S-corp or LLC? Stop asking the internet

Every forum thread on this ends the same way: someone says "S-corp saves you self-employment tax," someone else says "it's not worth the hassle," and you close the tab knowing exactly as much as when you opened it.

The reason the internet can't answer this is that it's not one question, and the answer depends on numbers only you have.

First: you're comparing two different things

This trips up almost everyone, so it's worth being precise.

An LLC is a legal entity. You form it with your state. It governs liability and who owns what.

An S-corp is a tax election. It's a choice about how the IRS treats your entity's income. It's not a thing you "become" instead of an LLC.

An LLC can be taxed as a sole proprietorship, a partnership, a C-corp, or an S-corp. So "should I be an LLC or an S-corp" is a bit like asking whether you should own a car or have insurance. Most small businesses that make this election stay an LLC and simply elect S-corp treatment.

What the election actually changes

Default LLC taxation: all net profit flows to you, and all of it is subject to self-employment tax — Social Security and Medicare — on top of income tax.

With an S-corp election, you split your income in two:

1. A reasonable salary, paid to you as an employee through actual payroll, subject to payroll taxes.
2. Distributions, the rest of the profit, not subject to self-employment tax.

That second bucket is the entire reason anyone does this. The savings are real.

They're also frequently smaller than the internet implies, because of what comes with them.

The three numbers that decide it

1. Your net profit

Not revenue — profit, after expenses, after paying yourself. This is the number the whole thing hinges on, because the savings scale with the amount you can reasonably characterize as distribution rather than salary. Below a certain profit level there's simply not enough room between "reasonable salary" and total profit for the math to clear the costs.

2. Your reasonable salary

Here's the part the forums skip. You don't get to pay yourself $10,000 and call the other $180,000 a distribution. The IRS requires reasonable compensation — roughly, what you'd have to pay someone else to do your job. It's a facts-and-circumstances test, and it's an audit trigger when it's obviously gamed.

The bigger the gap between your reasonable salary and your profit, the more the election is worth. If your profit is basically all a return on your own labor, that gap is small.

3. The annual cost of compliance

An S-corp election means a separate corporate return, real payroll with real filings, W-2s, and more bookkeeping. Whatever your accountant charges for that, plus payroll service, plus your time — that's the hurdle the tax savings have to clear before you're ahead at all.

Run those three numbers against each other and you have your answer. Skip any one and you're guessing.

What the internet's advice gets wrong

"There's a magic revenue number"

You'll see thresholds thrown around confidently. They're rules of thumb built on assumptions about someone else's business — their salary level, their state, their compliance costs, their profit margin. Yours differ. A number that's obviously right for a consultant can be obviously wrong for a contractor with equipment and payroll.

"It always saves money"

It doesn't. Below the break-even, you're paying more in compliance than you save in tax, for the privilege of more paperwork.

"It's only about tax"

The election has knock-on effects. It can change how a lender reads your income, complicate bringing on a partner, affect retirement plan contributions, and interact with state-level taxes and fees that vary enormously. Some states impose their own charges on S-corps that eat into the federal savings.

"You can just undo it"

Revoking an S-corp election isn't instant, and there are timing rules on getting back in. It's not a switch to flip annually based on how the year went.

The questions worth actually asking

If you're weighing this, these are the ones that matter:

• What's my actual net profit, and what will it be next year — not this year's outlier?
• What would I have to pay someone to do my job? Honestly?
• What will the extra compliance cost me annually, all in?
• What does my state do to S-corps specifically?
• Am I planning to add partners, raise money, or sell in the next few years?
• Will payroll actually get run properly, every period, forever?

That last one is not a joke. An S-corp election with payroll that quietly stops happening is worse than no election at all.

The honest answer

For a lot of businesses, this is genuinely worth doing and the savings compound year after year. For a lot of others, it's a tax strategy sold to people who'd be better served fixing their pricing.

Which one you are is knowable — but it takes about twenty minutes with your actual P&L, not twenty minutes reading strangers arguing about a business that isn't yours.