S-Corp vs LLC Tax Comparison Calculator — US 2025

LLC vs S-Corp: What's the Difference?

When you start a business in the United States, you'll quickly encounter two common entity choices: the Limited Liability Company (LLC) and the S-Corporation (S-Corp). Both provide personal liability protection — your personal assets are shielded from business debts and lawsuits. But they are taxed very differently, and that difference can translate into thousands of dollars per year once your business reaches a certain income level.

A single-member LLC is taxed as a sole proprietorship by default. The IRS treats the business as a "disregarded entity," meaning all net profit flows directly to your personal tax return. You pay self-employment (SE) tax — 15.3% on 92.35% of your net profit — on every dollar the business earns, regardless of how much you actually take home. On $120,000 in profit, that's roughly $16,956 in SE tax before federal income tax is even calculated.

An S-Corporation, on the other hand, requires you to pay yourself a "reasonable salary" as a W-2 employee of your own company. Only this salary is subject to FICA taxes (Social Security + Medicare, the equivalent of SE tax). The remaining profit — the difference between total profit and your salary — is distributed to you as a shareholder distribution, which is not subject to SE tax or FICA. This is where the tax savings come from.

How the S-Corp Election Works

An S-Corporation is not a separate entity type — it is a tax election you make with the IRS. You can elect S-Corp tax treatment for an existing LLC by filing IRS Form 2553. Once approved, the IRS treats your LLC as an S-Corporation for federal tax purposes. You still have the legal protections and flexibility of an LLC; you just gain the payroll structure of an S-Corp.

The election must generally be made by March 15 of the tax year it is to take effect (or within 75 days of forming a new entity). Late elections are sometimes accepted, but it's better to plan ahead. Most states automatically recognize the federal S-Corp election, but a few require a separate state-level filing.

Once you elect S-Corp status, you must set up payroll. This means running quarterly payroll, withholding federal and state income taxes, calculating and remitting FICA taxes, and filing quarterly payroll tax returns (Form 941). At year end, you'll file a corporate tax return (Form 1120-S) in addition to your personal return. This compliance burden is why most accountants recommend the S-Corp election only when the tax savings justify the extra cost.

The Reasonable Salary Requirement

The IRS requires S-Corp owner-employees to pay themselves a reasonable salary before taking distributions. "Reasonable" means a salary comparable to what a business would pay a non-owner employee to do the same work. The IRS scrutinizes S-Corps that pay very low salaries to maximize distributions and minimize FICA taxes — this is the #1 audit risk for S-Corps.

There is no fixed formula for reasonable salary, but common benchmarks include:

• Industry salary data from BLS, Glassdoor, or similar sources for your specific role
• 40–60% of net profit as a starting point for consultants and professional service providers
• What a third-party employee doing your job would cost

Paying too low a salary is risky — the IRS can reclassify distributions as wages and assess back FICA taxes plus penalties. This calculator defaults to 40% of profit as a conservative starting point, but your specific reasonable salary should be determined with a CPA familiar with your industry and revenue level.

When Does an S-Corp Election Make Sense?

The S-Corp election creates complexity and ongoing compliance costs. It only makes sense when the SE tax savings exceed those costs. As a rough rule of thumb:

• Under $40,000 in net profit: S-Corp rarely makes sense. SE tax savings are minimal and don't cover setup and compliance costs.
• $40,000–$80,000: A gray zone. Run the numbers carefully with a CPA. Savings may cover costs but the margin is thin.
• $80,000+: S-Corp election frequently makes sense. Tax savings typically exceed compliance costs by a meaningful margin.
• $100,000+: S-Corp election is commonly recommended and can save $5,000–$15,000+ per year depending on salary structure and state.

This calculator helps you estimate the annual SE tax savings so you can compare them against typical setup costs ($500–$2,000 one-time) and ongoing compliance costs ($500–$2,000 per year for payroll service and CPA preparation of the corporate return).

S-Corp Setup and Ongoing Costs

Before committing to the S-Corp election, budget for these costs:

• LLC formation / state filing fees: $50–$500 depending on state (if you don't already have an LLC)
• IRS Form 2553 filing: Free, but requires careful completion and timely submission
• Payroll service (e.g. Gusto, ADP): $50–$150/month for single-employee payroll
• CPA for corporate tax return (Form 1120-S): $500–$1,500 per year, on top of your personal return
• State-level S-Corp fees: Some states (California charges an $800 annual minimum franchise tax, for example) have fees that offset savings at lower income levels

In total, expect $1,000–$3,000 per year in additional compliance costs once you elect S-Corp treatment. This means you need annual SE tax savings above this threshold before the election becomes financially beneficial.

Frequently Asked Questions

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