S Corp vs LLC: Which Structure Saves More in Taxes?

If you're a business owner approaching or already exceeding $1M in annual revenue, this question has probably come up with your CPA, your attorney, or a fellow founder. And the answer you got was probably some version of: "It depends."

That's not a cop-out. It's the truth. But "it depends" is only useful if someone walks you through what it depends on.

That's what this post does. We'll cover how each structure works from a tax standpoint, where owners typically get it wrong, and how to figure out which direction makes sense for your situation.

What Is the Actual Difference Between an LLC and an S Corp?

An LLC, or Limited Liability Company, is a legal structure.

An S Corp is a tax election.

These are two different things and confusing them leads to bad decisions.

When you form an LLC, you get a legal entity that helps protect your personal assets from business liabilities. How that LLC gets taxed depends on elections you make with the IRS.

A single-member LLC is taxed as a sole proprietorship by default

A multi-member LLC is taxed as a partnership by default

Either type can elect to be taxed as an S Corp

So, when people ask, "Should I be an LLC or an S Corp?" what they usually mean is: should my LLC keep its default tax treatment, or should I elect S Corp status?

That's the real question.

How the Tax Difference Works

Here's the core mechanic.

When your business is taxed as a sole proprietorship or partnership, all of your net profit is subject to self-employment tax. That tax covers Social Security and Medicare. It runs about 15.3% on earnings up to the Social Security wage base, then 2.9% on earnings above that. On a business generating real profit, it adds up fast.

When you elect S Corp tax treatment, the math changes. You pay yourself a reasonable salary as an employee of your own business. That salary is subject to payroll taxes. But the remaining profit that flows through to you as a distribution is not subject to those taxes.

That gap is the savings people are referring to when they talk about S Corps.

A simplified example: Say your business earns $300,000 in net profit.

• Without an S Corp election: You owe self-employment tax on the full $300,000

• With an S Corp election: You pay yourself a reasonable salary of $120,000 and take the remaining $180,000 as a distribution. You only owe payroll taxes on the $120,000. The $180,000 avoids self-employment tax

The savings can be meaningful. But there are real costs and conditions attached.

Where Owners Get It Wrong

1) Electing S Corp status too early

The S Corp election makes sense when the tax savings from reduced self-employment taxes outweigh the additional costs of running payroll, maintaining proper records, and filing a separate business tax return.

For most businesses, the math starts to work somewhere around $50,000 to $80,000 in net profit. Below that, the administrative overhead often eats the benefit.

For owners at the $1M+ revenue level, electing too early is rarely the issue. The more common problem is waiting too long to optimize your whole tax situation or making the election without addressing the underlying financial issues.

2) Setting an unreasonably low salary

The IRS requires S Corp owner-operators to pay themselves a reasonable salary for the work they perform. You don't get to set that number artificially low to maximize distributions and minimize payroll taxes.

The IRS scrutinizes this. If your salary doesn't reflect what the market would pay for your role, you're carrying real audit risk.

Getting the number right requires looking at industry data, your actual responsibilities, and comparable compensation. It's not complicated, but it's something many owners skip or hand off to a CPA who does not push back.

3) Assuming structure alone solves the problem

This is the big one.

We see business owners make an entity change and expect their tax bill to drop, without changing anything else about how they manage their finances. That's not how it works.

The S Corp election is one lever. It only functions correctly if:

• Your books are clean and your profit is accurately measured

• You are paying yourself a documented, defensible salary

• Your payroll is running properly, on time, with correct withholdings

• Someone is monitoring this throughout the year, not just at filing time

Tax savings from structure is a byproduct of financial discipline. If your books are a mess, you can't optimize what you can't measure.

When an S Corp Election Makes Sense

An S Corp election is worth exploring if:

• Your business generates consistent profit, generally $80,000+ in net income

• You're actively working in the business and can document a reasonable salary

• You have clean financial records, or you are committed to getting there

• You're working with an advisor who will monitor payroll compliance and review the structure annually

At the $1M+ revenue level, most established businesses should have had this conversation and made a decision already.

When Staying as an LLC Makes More Sense

There are situations where the S Corp election is not the right move.

Your business is running losses

If you're in a growth phase and not yet profitable, the self-employment tax savings conversation is premature. Structure optimization is a profit problem, not a loss problem.

You have passive investors or complex ownership

S Corps have strict rules on the number and type of shareholders. Certain entity types, including C Corps, partnerships, and non-resident aliens, can't be S Corp shareholders. If your ownership structure is complex or likely to change, the S Corp election can create complications.

You're planning to sell

Depending on how a transaction is structured, S Corp status can affect how proceeds are taxed at exit. This is worth modeling before you elect, not after.

Your state taxes S Corps differently

Federal treatment is only part of the picture. Some states impose their own taxes on S Corp income or charge fees that reduce or eliminate the federal benefit. California, for example, imposes an additional 1.5% tax on S Corp net income. Your advisor should run state-specific numbers before recommending an election.

What Actually Determines Your Tax Outcome

The honest answer to "which structure saves more" is: neither automatically.

The structure is a vehicle. What determines the outcome is what you put in it, how you maintain it, and whether someone is watching it throughout the year.

Business owners who consistently pay less in taxes tend to share a few traits:

• Their books are current and accurate, so decisions are based on real numbers

• They have a tax plan in place before the year ends, not scrambling in March

• They meet with their advisor during the year, not just at filing time

• Their entity structure has been reviewed and fits their current size and situation

The ones who overpay are often organized, hardworking, profitable operators who simply don't have the right infrastructure around their finances.

That's a fixable problem.

What to Do Next

If you haven't had a serious conversation about your entity structure in the last 12 to 24 months, and your business is generating meaningful profit, it's time.

The starting point is not asking which entity is better. The starting point is understanding your current financial picture clearly enough to model the actual impact of a change. That requires clean books, current financials, and an advisor who's going to run the numbers for your specific situation.

At Kaufmann Advisors, we start every new client relationship with a Free Financial Assessment. It's a structured conversation where we look at your current financials, your entity structure, how you're paying yourself, and where the gaps are. No commitment required. You walk away with clarity on what's working, what's not, and what the highest-leverage next step is.

If you're a business owner approaching or exceeding $1M or more and you're not confident your current structure is optimized, that conversation is worth having.

Book a Free Financial Assessment

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Simon Hase is a Tax Planning CPA and Growth CFO and founder of Kaufmann Advisors. Kaufmann Advisors works with established business owners as a year-round strategic advisory partner.