- LLC is a state law entity giving liability protection, taxed by default as a sole proprietorship or partnership
- S corporation is a tax election on Form 2553, available to an LLC or a corporation
- The saving comes from splitting income into reasonable salary and distributions, since only the salary carries payroll tax
- Reasonable is not a number you choose freely, and paying yourself too little is an audit trigger
- The election adds payroll administration and a separate Form 1120-S return, which costs money every year
Today you pay self-employment tax on the whole $95k.
As an S corp you split it into a reasonable salary and distributions. Only the salary carries payroll tax, so the saving is real and material at your level.
Reasonable is not your choice. Paying yourself far too little is a well-known audit trigger. For your trade and revenue, the market rate is the anchor.
Costs: payroll service, a separate Form 1120-S return, state costs and more bookkeeping, and together they have to stay under the saving.
Net, worth doing at $95k. Lower down, the costs eat the saving, so model it at your numbers. Want me to run your actual numbers?
It gave the answer, the risk, and the costs the saving has to beat.
| Self-employment tax as a sole proprietor: $100,000 x 92.35% x 15.3% | $14,129.55 |
| Less payroll tax as an S corporation on a $60,000 salary: $60,000 x 15.3% | -$9,180 |
| Saving before the costs of the election | $4,949.55 |
That saving is what the costs must stay under: payroll service, the extra return, state costs, and a smaller QBI deduction and retirement room. The salary also has to be one a court would accept, so model it with your real numbers.
Reasonable compensation
Salary must be reasonable for the services you perform. In Watson, a CPA's corporation paid him $24,000 a year in salary and distributed over $175,000 a year, and the court upheld treating $91,044 a year as reasonable compensation. As of Oct 2026.
David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012)
Making the election
File Form 2553 within 2 months and 15 days of the start of the tax year, so by March 15 for a calendar year; relief for a late election exists under Rev. Proc. 2013-30. California taxes an S corporation at 1.5% of its net income, with an $800 minimum, and New York City does not recognize the election at all. As of Oct 2026.
IRC sec. 1362(b); Rev. Proc. 2013-30; Cal. Rev. & Tax. Code secs. 23802 and 23153
What an LLC does not protect
An LLC can separate business obligations from your personal assets, but it does not protect you from your own torts or professional negligence, and the protection can be lost through personal guarantees or veil piercing. A single-member LLC is taxed as a sole proprietorship unless it elects otherwise.
Treas. Reg. 301.7701-3; state LLC law
Below the crossover the compliance cost is larger than the saving. Above it, not electing is leaving money behind.
I run a [type of business] in [state] as a [sole proprietor, single-member LLC], with roughly [profit] a year. Model whether an S corp election makes sense at my numbers, including the cost of the extra compliance.
Every lesson ends with a question to hand to a Greymill specialist, who answers with what it knows about your business.