S Corp vs LLC: When the Switch Actually Saves Money

Reviewed by Alex Brown, CPA, Owner of Brown Accounting and FlowFi expert

Everyone tells small business owners to “become an S corp.” Almost nobody tells them when it’s actually worth it.

The short answer. An LLC and S corp aren’t really two options you have to choose between. An LLC is how your business is legally structured. An S corp is a way that businesses can be taxed. Many LLCs elect S corp status once they’re profitable enough. As a rule of thumb, the switch often makes sense around $80,000 to $100,000 a year in net profit, depending on reasonable salary and your state. It also depends on the costs of running an S corp.

LLC vs. S corp: What’s the difference?

An LLC (limited liability company) is a legal structure you set up with your state. It separates your personal assets from the business. By default, the IRS taxes a single-owner LLC like a sole proprietorship. All of your profit is subject to income tax and self-employment tax.

An S corp isn’t a type of company you form. It’s a tax election you make with the IRS. Your LLC stays an LLC. It’s taxed differently, and that’s where the savings can come from.

This example is for illustration only. Actual savings depend on reasonable compensation, payroll taxes, federal and state tax rules, and the additional costs of operating as an S corp.

Then subtract the cost of running an S corp: a payroll provider, a separate business tax return, and any state fees. State taxes and fees vary and change the break-even point. That’s why the math tends to work only once profit is high enough, and why the break-even point is different for every business.

Alex Brown, CPA, on when an S corp actually saves money

The catch: what an S corp adds to your plate

The tax savings are real, but so is the extra work. Once you’re an S corp, you become an employee of your own company. That means:

• A reasonable salary. You have to pay yourself a fair wage for the work you do, not a token $10,000.

• Real payroll. You run payroll through a provider and withhold income tax, Social Security, and Medicare.

• More filings. Quarterly payroll returns, a year-end W-2 for yourself, and a separate business tax return.

None of this is hard with the right help. But it’s more than most owners realize, and many only find out when an IRS notice or penalty shows up.

Choosing S corp status isn’t just about a lower tax bill. It’s about understanding whether the savings make sense for your business and having the right expertise to manage what comes next. FlowFi helps businesses find that expertise, matching them with vetted tax, accounting, and payroll professionals based on their specific needs.

The mistake the IRS flags

“The mistake I see most is owners taking distributions and skipping payroll entirely, which is exactly what the IRS looks for.”
— Alex Brown

It’s tempting to skip payroll and take everything as distributions, since that’s where the tax savings are. But the IRS requires a reasonable salary for owners who work in the business, and it can treat distributions as wages and charge the payroll taxes you skipped. If you elect S corp status, put yourself on payroll.

Alex Brown, CPA, on putting yourself on payroll as an S corp

How to switch your LLC to an S corp (and the deadline)

To have your LLC taxed as an S corp, you file Form 2553 with the IRS. It’s due 2 months and 15 days after the start of the tax year the election takes effect (March 15 for calendar-year businesses), or 75 days from formation for a new entity. You can also file it anytime during the year before. Late-election relief is generally available under Rev. Proc. 2013-30 within 3 years and 75 days.

Most owners don’t file this on their own, and they don’t have to. A FlowFi expert can run the numbers on your profit, help set a reasonable salary, file Form 2553, and set up payroll, so the switch is done right the first time.

Wondering if an S corp makes sense for your business?

There’s no universal profit threshold. What works for one business might not work for another. FlowFi matches you with vetted tax experts who understand your business and can help you figure out whether making the switch is worth it.

Talk to a tax expert →

Related: Tax prep and filing · Bookkeeping services · Payroll and HR

FAQ

Is an S corp worth it if I make less than $50,000? Usually not. At that level, the cost of payroll and an extra tax return tends to cancel out the savings. As a rule of thumb, the switch often makes sense around $80,000 to $100,000 a year in net profit, depending on a reasonable salary and your state.

What’s a reasonable salary for an S corp owner? Roughly what you’d pay someone else to do your job. It depends on your role, hours, industry, and comparable pay, so it’s worth settling with an accountant.

How do I switch my LLC to an S corp? You don’t change the LLC itself. You file Form 2553 to have it taxed as an S corp, and your LLC stays the same with your state. Then set up payroll so you can pay yourself a reasonable salary before taking distributions.

What’s the difference between a salary and a distribution? Your salary is paid through payroll, with Social Security and Medicare taxes withheld. A distribution is profit you take out on top of your salary, without those taxes. You need a reasonable salary first. Learn more about salary vs. distributions.

Can I switch my LLC to an S corp later? Yes. Many owners elect S corp status once their profit makes it worthwhile. Just watch the Form 2553 deadline for the year you want it to start.

Can a single-member LLC be an S corp? Yes. A single-owner LLC can elect S corp status by filing Form 2553, as long as it meets the IRS requirements. Most single-owner businesses do.