The LLC vs. S-Corp question is one of the most common — and most frequently answered incorrectly — in small business tax planning. The internet is full of generic advice ("if you make over $50K, elect S-Corp status"), but the actual math depends on your specific situation and has shifted with 2026 tax changes.

Let's cut through the noise with real numbers.

The Core Tax Difference

As a single-member LLC (taxed as a sole proprietorship), you pay self-employment tax on all net business income. The self-employment tax rate is 15.3% (12.4% Social Security + 2.9% Medicare) on income up to $168,600 (2026 cap), and 2.9% on income above that threshold.

As an S-Corp, you pay yourself a "reasonable salary" — and only that salary is subject to payroll taxes. The remaining profit passes through as a distribution, which is not subject to self-employment tax.

The savings come from the spread between your total income and your reasonable salary. But there are costs to maintain an S-Corp that offset those savings at lower income levels.

The Math at Three Income Levels

Scenario 1: $75,000 Net Business Income

LLC (sole prop):

  • Self-employment tax: $75,000 × 92.35% × 15.3% = $10,597
  • Total tax burden (SE + income tax at 22% marginal rate): ~$21,100

S-Corp (salary $50,000 + distribution $25,000):

  • Payroll taxes on salary: $50,000 × 15.3% = $7,650
  • Income tax on $75,000: ~$10,500
  • Additional S-Corp costs: payroll service ($1,200/yr), additional tax return ($1,500), registered agent ($125)
  • Total: ~$20,975

Savings: ~$125/year — essentially a wash. At this income level, the S-Corp barely breaks even after accounting for the additional compliance costs. Verdict: Stay as LLC.

Scenario 2: $150,000 Net Business Income

LLC (sole prop):

  • Self-employment tax: $150,000 × 92.35% × 15.3% = $21,194
  • Total tax burden: ~$46,200

S-Corp (salary $70,000 + distribution $80,000):

  • Payroll taxes on salary: $70,000 × 15.3% = $10,710
  • Income tax on $150,000: ~$25,000
  • S-Corp compliance costs: ~$2,825
  • Total: ~$38,535

Savings: ~$7,665/year — now we're talking. The S-Corp saves meaningful money at this level. Verdict: Elect S-Corp status.

Scenario 3: $300,000 Net Business Income

LLC (sole prop):

  • Self-employment tax: complex calculation (SS cap at $168,600 + Medicare on all): ~$32,800
  • Additional 0.9% Medicare surcharge on income over $200,000: ~$900
  • Total tax burden: ~$82,700

S-Corp (salary $130,000 + distribution $170,000):

  • Payroll taxes on salary: $130,000 × 15.3% = $19,890
  • Income tax on $300,000: ~$50,000
  • S-Corp compliance costs: ~$3,500
  • Total: ~$73,390

Savings: ~$9,310/year — substantial, and the gap widens further at higher income levels. Verdict: S-Corp is clearly advantageous.

The "Reasonable Salary" Trap

The IRS scrutinizes S-Corp officer compensation. Set your salary too low, and you risk reclassification of distributions as wages (plus penalties and interest). The IRS looks at:

  • Comparable salaries for similar positions in similar industries
  • Time and effort you devote to the business
  • Your qualifications and experience
  • The company's revenue and profitability

A common guideline: salary should represent at least 40-60% of total income, though there's no bright-line rule. Using data from the Bureau of Labor Statistics' Occupational Employment Statistics to benchmark is a defensible approach.

Key Takeaways

  • The S-Corp breakeven point in 2026 is approximately $80,000-$90,000 in net business income
  • Below $80K: LLC simplicity wins — the tax savings don't justify the compliance costs
  • Above $100K: S-Corp savings become significant ($5,000-$10,000+ annually)
  • Set your salary at 40-60% of income using BLS data as your benchmark — document your reasoning
  • Factor in compliance costs: payroll service, additional tax return, registered agent, and potentially higher accounting fees
  • Consult a CPA before making the election — your state tax treatment may differ (some states don't recognize S-Corp election)