LLC vs S Corp: Which Saves You More on Taxes?

When you’re building a business, one of the first (and most important) decisions you’ll make is choosing the right structure—LLC vs S Corp. This might sound like boring legal stuff, but it can seriously impact your taxes, personal liability, and how you get paid.

I’ve gone through this process myself, and believe me, the choice isn’t just about paperwork. It’s about how much money you keep in your pocket. This blog post is here to break it all down—without any confusing jargon.

Whether you’re a freelancer, small business owner, or launching your next startup, understanding LLC tax benefits, how S Corp elections work, and the difference in pass-through taxation can help you make a smart, strategic decision. The goal of this post? Give you real, experience-based info to help you pick the best option in 2025 and beyond.

1. What’s the Real Difference Between an LLC and an S Corp?

At first glance, both LLCs and S Corps seem similar—they’re both popular choices for small business owners. But dig deeper, and the differences matter.

An LLC (Limited Liability Company) is a flexible legal entity that protects your personal assets. It’s super simple to start and manage. You can be a one-person show (single-member LLC) or run it with a team (multi-member LLC).

An S Corporation, on the other hand, isn’t actually a type of business entity. It’s a tax election made with the IRS by either an LLC or a corporation. When you file an S Corp election, you tell the IRS you want to be taxed like an S Corp to take advantage of certain tax benefits—mainly reducing self-employment tax.

Pro Tip: If you’re just starting and want fewer rules, an LLC might be your best bet. But if you’re profitable and ready to pay yourself a salary, electing S Corp status could save you big money.

2. How Does Pass-Through Taxation Work for LLCs and S Corps?

Let’s get one thing straight: Both LLCs and S Corps benefit from pass-through taxation—meaning the business itself doesn’t pay federal income tax. Instead, profits “pass through” to your personal tax return.

LLC Taxation:

An LLC is taxed like a sole proprietorship (if single-member) or partnership (if multi-member). That means you pay income tax and self-employment tax on all profits.

S Corp Taxation:

If you make an S Corp election, you divide your income:

• Part goes to you as W-2 salary (taxed like regular employee wages)

• Part goes as profit distribution, which is not subject to self-employment tax

This can lead to significant tax savings.

Example: You earn $120,000 in net profit.

• As an LLC: You pay self-employment tax on the entire $120K.

• As an S Corp: You pay yourself a “reasonable” salary of $70K (taxed with SE tax), and take the remaining $50K as a distribution—free from SE tax.

Quick Guide: The more your business earns, the more you might benefit from S Corp status. But be careful—underpaying yourself just to avoid taxes can trigger IRS audits.

3. What Are the LLC Tax Benefits Every Business Owner Should Know?

LLC tax benefits go beyond just pass-through taxation. Here are some real advantages:

• Flexible taxation: You can start as a sole proprietorship or partnership, then elect to be taxed as an S Corp or even a C Corp later.

• Business expense deductions: Just like other entities, you can deduct home office expenses, equipment, travel, and more.

• Avoid double taxation: Unlike C Corporations, LLCs don’t pay corporate tax and then again on dividends.

• Self-employment tax simplicity: You pay tax once—no salary/distribution split to worry about.

• Less IRS scrutiny: LLCs are subject to fewer compliance checks than S Corps.

Note: For low-profit businesses, sticking with a plain LLC often makes more sense than jumping into S Corp territory too early.

4. How Does an S Corp Election Lower Self-Employment Tax?

If there’s one reason to consider becoming an S Corp, this is it: lowering your self-employment tax.

Normally, when you’re self-employed, you pay both the employer and employee portions of Social Security and Medicare—totaling 15.3% on your net profit.

With an S Corp, only your salary is subject to this tax. The rest (your profit distribution) isn’t. That’s where the savings happen.

Example Tax Savings:

Guide: Always pay yourself a reasonable salary based on industry standards. The IRS doesn’t like it when business owners try to game the system.

5. What Compliance Requirements Come With an S Corp?

Electing to be taxed as an S Corp comes with more responsibilities than a standard LLC. Here’s what you need to stay compliant:

• Payroll System: You must run payroll and file W-2 forms with the IRS.

• Reasonable Salary: Document and pay yourself a legitimate wage.

• Corporate Formalities: Even if you’re still an LLC, you may need to hold annual meetings, keep minutes, and maintain updated bylaws.

• Quarterly Payroll Taxes: You’re now on the hook for IRS deadlines for employment taxes.

• Form 1120S Filing: This is your corporate tax return (due by March 15 every year).

Pro Tip: If you’re not ready to handle the paperwork, hire an accountant or payroll service. S Corp tax advantages are worth it only when you follow the rules.

6. How Do You Know When It’s Time to Switch From LLC to S Corp?

There’s no magic number, but here are some signs you might be ready for S Corp election:

• You consistently earn more than $50,000 in net profit

• You’re comfortable running payroll and handling extra paperwork

• You want to save on self-employment tax

• You have a solid record of paying business taxes and keeping books in order

S Corp election deadline: To be taxed as an S Corp for the current tax year, you must file Form 2553 within 75 days of forming your business or the start of the tax year.

Note: Talk to a CPA before switching. If you’re not making enough yet, the cost of compliance could outweigh the tax savings.

7. What Do Real-World Business Owners Say? (Case Studies and Data)

Let’s look at some real data and stories to make this feel less abstract.

Case Study 1: Freelance Designer

• Income: $80,000/year

• Structure: Started as LLC → switched to S Corp

• Result: Saved ~$4,500/year in self-employment tax after S Corp election and setting a salary of $50K

Case Study 2: Tech Consultant

• Income: $200,000/year

• Structure: Multi-member LLC → elected S Corp

• Result: Saved over $15,000 in taxes annually by splitting salary/distribution smartly

According to U.S. Small Business Administration, more small businesses are moving to hybrid models where they start as LLCs and later switch to S Corps once profits increase.

Guide: Analyze your business income annually and adjust your entity as you grow.

8. How to Decide: LLC vs S Corp – A Side-by-Side Business Entity Comparison

Here’s a quick summary to help you decide which fits you better in 2025.

If you’re earning over $70,000 net, an S Corp election might help you save thousands. But if you’re still building your income, a plain LLC with LLC tax benefits and low upkeep could be the perfect fit.

Final Thoughts

Picking between an LLC vs S Corp isn’t about which one is “better”—it’s about what fits your business right now.

If you want simplicity and flexibility, start with an LLC. As you grow and your income rises, you can consider an S Corp election to take advantage of those sweet tax savings and pay yourself a salary.

At the end of the day, don’t overthink it—but don’t ignore it either. This choice impacts your taxes, your stress levels, and your take-home income.

My advice? Start small, stay compliant, and upgrade when it makes sense. And always run the numbers with a tax pro.

Still stuck? Drop your questions in the comments or reach out—this stuff is tricky, but you don’t have to figure it out alone.