Compare S-Corp vs LLC tax treatment. Calculate potential SE tax savings from electing S-Corp status for your business.
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💡 Salary should be 30–60% of net profit or market rate for your role, whichever is higher.
A Texas-based freelance graphic designer earns $140,000 net profit/year from client work. She's evaluating whether to stay as a sole proprietor, form an LLC, or elect S-Corp status to reduce self-employment taxes.
Takeaway: S-Corp saves $8,300/year but adds ~$1,500-$3,000 in accounting fees (payroll, extra returns). Break-even is around $80-90K net profit. Below that, the overhead eats the savings. Texas has no state income tax, so the benefit is purely federal SE savings.
LLC annual fees range from $0 (Ohio) to $800 minimum (California, even for zero-revenue LLCs). Delaware C-Corp is standard for VC-backed companies but adds registered agent costs (~$300/yr) for out-of-state entities. The "best" structure is state-specific.
S-Corps cannot have more than 100 shareholders, cannot have non-US shareholders, and cannot have corporate shareholders. Violating these rules (e.g., adding a foreign investor) terminates S-Corp status retroactively, potentially creating a large unexpected tax event.
The IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" before taking distributions. There is no fixed formula — the IRS looks at industry benchmarks, duties, and hours worked. Setting the salary too low is a common audit trigger for S-Corps.
Business break-even models track revenue vs. direct costs. They rarely factor in the owner's time as a cost. If you're working 60 hours/week at imputed $50/hour, your "profitable" business may be paying you $12/hour after the opportunity cost calculation.
Break-Even CalculatorA service business valued on EBITDA multiples (2-4×) gets a very different number than one valued on SDE (seller's discretionary earnings) or discounted cash flow. Buyers and sellers typically use different methods to argue their preferred price. This calculator uses a single method.
Business Valuation CalculatorBased on your inputs
✓ S-Corp is worth it
| Net Business Profit | $100,000 |
|---|---|
| LLC Self-Employment Tax | $14,130 |
| S-Corp Owner Salary | $50,000 |
| S-Corp Distributions (no SE tax) | $46,175 |
| S-Corp Total Payroll Tax | $7,650 |
| Gross Tax Savings | $6,480 |
| S-Corp Annual Costs | -$2,000 |
| NET SAVINGS | $4,480 |
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Generally when net profit exceeds $40,000–$50,000/year. The SE tax savings need to outweigh the added costs (payroll, extra accounting fees ~$1,000–$2,500/yr).
As an LLC, all net profit is subject to 15.3% SE tax. With S-Corp, you pay yourself a 'reasonable salary' (subject to payroll taxes), then take remaining profit as distributions (NOT subject to SE tax).
The IRS requires S-Corp owners to pay themselves a reasonable salary for services rendered. Typically 30–60% of net profit, comparable to market rate for your role.
Additional costs: payroll setup, payroll tax filings, state S-Corp fees, extra accounting. Must have a separate payroll. Some states don't recognize S-Corps or charge extra fees (CA: $800 minimum franchise tax).
Yes. A single-member LLC can elect S-Corp taxation by filing IRS Form 2553. The LLC remains an LLC legally but is taxed as an S-Corp. File by March 15 for the current tax year or within 75 days of formation.
S-Corps are limited to 100 shareholders, all of whom must be US citizens or residents. Shareholders cannot be other corporations, partnerships, or non-resident aliens. These restrictions do not apply to LLCs taxed as partnerships.
S-Corp payroll services typically cost $30-$80 per month through providers like Gusto or ADP. Annual payroll tax filing adds $200-$500 in accountant fees. Total added cost is usually $500-$1,500 per year compared to an LLC.
S-Corps file Form 1120-S by March 15 annually, one month earlier than personal returns. A 6-month extension is available via Form 7004. K-1 schedules must be issued to shareholders by the filing deadline.
Yes, up to 100 shareholders. Each owner receives a K-1 showing their share of income. All owners receiving services must take reasonable salaries. Profit distributions must be proportional to ownership percentages.
File IRS Form 2553 to elect S-Corp taxation within 75 days of the start of the tax year or anytime in the prior year. Your LLC structure stays the same legally but is taxed as an S-Corp, enabling salary and distribution splits to reduce self-employment tax.
LLC SE Tax = Net Profit × 92.35% × 15.3%
S-Corp Payroll Tax = Salary × 15.3%
Net Savings = LLC SE Tax − S-Corp Payroll − Annual Costs
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Calculations are for educational purposes only. Consult a qualified financial advisor for personalized advice.