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

LLC vs S corp, what is the difference? Compare default LLC taxes with the S corp election, self employment tax savings, and who should file Form 2553.

The core difference

LLC vs S corp is not really a choice between two business types. An S corp is a tax status, not a business structure. You form an LLC first, then elect to be taxed as an S corporation by filing Form 2553 with the IRS. The main reason owners make this election is to save on self employment tax. This guide explains how it works and whether it is right for you.

Every LLC starts with the default tax treatment. A single member LLC is taxed like a sole proprietorship, and a multi member LLC is taxed like a partnership. An S corp election changes only the tax rules, not the legal structure. Your company is still an LLC with the same liability protection. The difference is how the IRS taxes your profits and how you pay yourself.

How a default LLC is taxed

In a default LLC, all profits pass through to you and are taxed on your personal return. You pay income tax plus self employment tax of about 15.3% on the entire profit. That 15.3% covers both the employee and employer share of Social Security and Medicare. On $100,000 of profit, that is roughly $15,300 in self employment tax alone, on top of income tax.

How an S corp election changes things

With S corp status, the LLC still passes profits through, but the tax math changes. You must pay yourself a reasonable salary as a W-2 employee, and payroll taxes apply to that salary. The remaining profit is distributed to you as a shareholder and is not subject to self employment tax. The tradeoff is that you now run payroll, file payroll tax returns, and pay unemployment tax.

The extra work is real. You will run payroll every pay period, file Form 941 quarterly, and give yourself a W-2 at year end. Many owners use a payroll service for $30 to $100 per month to handle this. The tax savings need to cover those costs before the election pays off.

The self employment tax savings

The savings come from the profit above your salary. Say your LLC earns $100,000 and you pay yourself a $60,000 salary. Payroll taxes hit the $60,000, but the remaining $40,000 avoids the 15.3% self employment tax, saving about $6,000. The catch is that the salary must be reasonable for your work, and the extra payroll costs can eat into the savings for smaller businesses.

Who should elect S corp status

The election usually makes sense when your profit is high enough to justify the payroll overhead. A common rule of thumb is $40,000 to $60,000 or more in annual profit. Below that, the payroll costs and extra filings often cost more than the tax savings. It also matters how much of your profit is really a return on your labor, since that part should be salary anyway. For help structuring your pay, see our guide to paying yourself from an LLC.

How to file Form 2553

To elect S corp status, file Form 2553 with the IRS. The deadline is generally within 2 months and 15 days after the start of the tax year you want the election to apply to. For a new LLC, that means filing within 75 days of formation. The form asks for your LLC's name, EIN, and the signatures of all owners. You can file by mail or fax, and the IRS usually responds within 60 days.

Once the IRS approves the election, your tax year starts fresh under S corp rules. You will file Form 1120-S each year and issue K-1s to shareholders. Your accountant can handle the transition, but you should decide on your salary before the first payroll run.

Frequently Asked Questions

Is an S corp better than an LLC?

It depends on your profit. An S corp election can save thousands in self employment tax, but it adds payroll requirements and costs. For most LLCs earning under about $50,000, the default LLC tax treatment is simpler and cheaper.

How much can I save with an S corp?

You save 15.3% on the profit above your reasonable salary. On $100,000 of profit with a $60,000 salary, that is about $6,000 per year, minus the added payroll costs.

What is the deadline to file Form 2553?

Generally within 2 months and 15 days after the start of the tax year. For a new LLC, that is within 75 days of formation. Late filings are sometimes accepted with a reasonable cause explanation.

Do I have to pay myself a salary as an S corp?

Yes. The IRS requires a reasonable salary for the work you do, and it must be paid through payroll with W-2 wages. Paying yourself nothing and taking everything as distributions is a red flag.

Can I switch back from S corp to a regular LLC?

Yes, but the IRS limits how often you can change. You generally cannot re elect S corp status for five years after revoking it, so make the decision carefully.