LLC vs S-Corp: Tax Planning Considerations for Business Owners

Your Business Structure Affects Your Tax Bill

Many business owners form an LLC and never think about it again.

But the way your business is structured determines how much you pay in taxes.

How an LLC Is Taxed

By default, a single-member LLC is taxed as a sole proprietorship.

That means:

• All profit is subject to self-employment tax (15.3%)
• No separation between personal and business income for tax purposes
• Simple to set up, but expensive as you grow

How an S-Corp Is Taxed

An S-Corp lets you split income between a salary and distributions.

Only the salary portion is subject to payroll taxes. Distributions are not.

This may reduce self-employment tax in some situations, depending on income level, reasonable compensation, and other facts.

When to Consider the Switch

An S-Corp election typically makes sense when:

• Your net business income exceeds $50,000-$60,000
• You can pay yourself a reasonable salary
• You want to reduce self-employment tax liability

The Tradeoff

S-Corps come with more requirements:

• Payroll setup and filings
• Stricter recordkeeping
• Reasonable compensation rules

Bottom Line

The right structure depends on your income, goals, and how your business operates.

Getting this decision wrong can create avoidable tax, payroll, and administrative issues.