LLC vs. S-Corp: Which Structure Saves You More on Taxes?

Choosing the right business structure is one of the most important financial decisions an entrepreneur can make. While both an LLC (Limited Liability Company) and an S-Corp (S Corporation) provide liability protection and tax flexibility, they can affect your bottom line in very different ways. Understanding how each structure works can help you make an informed decision that saves you money and aligns with your long-term business goals.

At Taxtensive, we often meet business owners who aren’t sure which option benefits them the most. The truth is, both structures can work well, but depending on your income and how you pay yourself, one may offer significant tax advantages over the other.

How an LLC Is Taxed
An LLC is one of the simplest and most flexible business structures available. By default, it’s treated as a pass-through entity, which means the business itself doesn’t pay income tax. Instead, all profits pass through to your personal tax return, where you pay income tax and self-employment tax.

If you’re the sole owner, the IRS considers your LLC a sole proprietorship. If you have partners, it’s treated as a partnership. Either way, you’ll pay the standard self-employment tax rate of 15.3 percent for Social Security and Medicare, applied to your entire net earnings.

For example, if your LLC makes $100,000 in profit, you’ll owe self-employment tax on that entire amount, roughly $15,300, in addition to your regular income tax. While this setup keeps things simple and requires minimal paperwork, it can also result in higher taxes as your profits grow since every dollar of net income is subject to self-employment tax.

Still, the LLC remains popular for small business owners and freelancers because it’s easy to set up, inexpensive to maintain, and flexible. You can always adjust your tax classification later once your income increases and you’re ready to optimize your tax strategy.

How an S-Corp Is Taxed
An S-Corp is not a separate type of company but rather a tax election your LLC can make with the IRS. It allows you to enjoy pass-through taxation like an LLC while providing an opportunity to save on self-employment taxes. The key difference is that as an S-Corp owner, you only pay self-employment tax on your salary, not on the entire profit of the business.

Here’s how it works. Suppose your business earns $100,000 in profit. You decide to pay yourself a reasonable salary of $60,000 and take the remaining $40,000 as a distribution. You’ll pay self-employment tax only on the $60,000 salary, not the full $100,000. The $40,000 distribution is exempt from payroll taxes, which can save you thousands of dollars each year.

However, with those savings come a few responsibilities. You’ll need to set up payroll, file additional tax forms, and ensure your salary is “reasonable” according to IRS guidelines. The extra compliance can be a small price to pay for the potential tax savings, but it’s something to be aware of if you prefer to keep your operations as simple as possible.

When an S-Corp Makes Sense
For many business owners, the S-Corp structure starts making financial sense once annual profits reach around $60,000 or more. At that level, the savings on self-employment taxes usually outweigh the additional costs of payroll and bookkeeping.

If your income is stable and you plan to keep growing, an S-Corp can be a smart move. But if you’re still in the early stages or your earnings fluctuate, staying as an LLC might be the better choice for now. It offers flexibility without the added administrative work that comes with running payroll.

At Taxtensive, we often recommend a gradual approach. Start your business as an LLC and switch to S-Corp status once you hit consistent profitability. This allows you to keep your setup lean in the early stages and then benefit from tax efficiency when your income justifies the transition.

Why the Right Choice Matters
Your business structure affects more than just your taxes. It impacts how you pay yourself, how investors view your business, and how easily you can scale in the future. Choosing the right setup can mean the difference between overpaying the IRS and reinvesting that money into your growth.

An LLC gives you simplicity and flexibility, while an S-Corp rewards you for higher profits with potential tax savings. The key is to align your structure with your current financial situation and your business goals.

At Taxtensive, we help business owners evaluate their income, expenses, and long-term objectives to determine which structure keeps more money in their pockets. Rather than guessing, you can make a strategic decision backed by numbers and supported by experts who know exactly how to navigate the IRS rules.

Final Thoughts
Both LLCs and S-Corps offer excellent benefits for small business owners, but the right choice depends on where you are in your business journey. If your profits are modest or unpredictable, starting as an LLC keeps things simple. Once your income stabilizes and grows, electing S-Corp status can unlock meaningful tax savings.

No matter which path you take, the key is to understand the financial impact of your choice. The right structure can help you lower your tax burden, stay compliant, and set your business up for long-term success.

If you’re unsure which option is best for you, Taxtensive can help you compare the numbers, understand the implications, and make the transition smoothly.

Book a free consultation today at www.taxtensive.com and find out which structure helps you keep more of what you earn.