How the LLC vs S-Corp comparison works
Schedule C SE tax ≈ 92.35% of profit × applicable Social Security and Medicare ratesillustrative difference = SE tax − combined salary FICA − entered annual costsA default single-member LLC is generally disregarded for federal income tax and an individual owner’s trade or business is generally subject to self-employment tax. An eligible entity may elect S-Corp treatment, but shareholder-employees performing services must receive reasonable compensation before non-wage distributions.
Understanding the result
The result compares payroll-related amounts only. It excludes federal and state income tax, QBI, unemployment tax, retirement plans, health insurance, accountable plans, basis, distributions, penalties, and entity eligibility. Salary must reflect training, duties, time, comparable pay, and the source of receipts—not a percentage chosen to maximize savings.
Frequently asked questions
At what profit does an S-Corp save taxes?
No universal threshold exists. Savings appear only when payroll-tax differences exceed payroll, tax preparation, state, insurance, and compliance costs after using defensible reasonable compensation.
Does an S-Corp eliminate self-employment tax?
No. W-2 salary is subject to payroll taxes, and the IRS can reclassify distributions as wages when compensation is unreasonably low.