IRS
S-Corp vs. LLC: which one actually saves you more in taxes?
An LLC and an S-corp are not opposites, and choosing between them is really a choice about how your profit gets taxed. Here is how to think it through.
Quick answer
For most profitable small businesses, an LLC taxed as an S-corp saves the most in taxes once net profit is consistently above roughly $50,000–$80,000 a year. Below that, a plain LLC is usually simpler and cheaper. The S-corp savings come from splitting your income into a reasonable salary (which is subject to payroll tax) and distributions (which are not), but it adds payroll filings, a separate return, and real compliance costs.
It is one of the most common questions we hear from new business owners in Metro Detroit, and it is almost always framed the wrong way. “Should I be an LLC or an S-corp?” treats the two as competing options. They are not. An LLC is a legal structure created at the state level. An S-corp is a tax election you make with the IRS. You can be both at the same time, and for a lot of profitable businesses, that combination is exactly the goal.
What is the actual difference?
A limited liability company (LLC) is formed with the State of Michigan. It separates your personal assets from your business liabilities and, by default, is taxed as a “pass-through”: profit flows to your personal return and you pay income tax plus 15.3% self-employment tax on essentially all of it.
An S-corp is not a separate kind of company. It is an election (IRS Form 2553) that changes how an LLC or corporation is taxed. Once elected, you become an employee of your own business. You pay yourself a reasonable salary through payroll, and the remaining profit comes to you as distributions that are not subject to the 15.3% self-employment/payroll tax.
The S-corp question is really one question in disguise: how much of my profit can I legitimately move from ‘salary’ to ‘distribution’ without raising a flag?
How the tax savings actually work
Say your business nets $120,000 in profit. As a default LLC, you would owe self-employment tax on close to the full amount, roughly $17,000 before income tax. As an S-corp, you might pay yourself a $70,000 salary (subject to payroll tax) and take $50,000 as a distribution. You have just removed $50,000 from the 15.3% calculation, saving on the order of $7,000 in a single year.
That is the headline. The fine print is where an advisor earns their fee:
- “Reasonable” is not optional. The IRS expects your salary to reflect what you would pay someone else to do your job. Pay yourself $15,000 and distribute $105,000 and you are inviting an audit.
- The S-corp has costs. A separate 1120-S return, payroll processing, state filings, and usually higher bookkeeping fees. Budget $1,500–$3,500 a year in added compliance.
- It changes your retirement math. Solo 401(k) and SEP-IRA contribution limits are tied to your W-2 wages, so a lower salary can quietly lower how much you can shelter for retirement.
- QBI still applies. The 20% Qualified Business Income deduction interacts with both structures and with your salary level, it is part of the same optimization, not a separate one.
When does the S-corp election make sense?
As a rough rule of thumb, the math starts to favor an S-corp election once your business consistently nets more than about $50,000–$80,000 in profit beyond what you need to pay yourself. Below that, the added compliance cost can eat most of the savings, and a plain LLC keeps your life simple.
But profit is only one input. The right answer also depends on whether you have other employees, whether you are reinvesting heavily, your retirement-savings goals, and whether you plan to bring on partners or sell. This is precisely the kind of decision that should be modeled with real numbers before you file anything.
Want this applied to your numbers?Book a free 30-minute advisory review with a senior member of our team.
Book a review A note for Michigan owners specifically
Michigan recognizes the federal S-corp election, and there is also a flow-through entity (FTE) tax election that can let the business deduct state taxes at the entity level, a workaround to the federal SALT cap that is genuinely valuable for many owners. Whether it benefits you depends on your income and itemizing situation. It is a good example of why “LLC or S-corp” is rarely the whole conversation.
Frequently asked questions
Can I switch from an LLC to an S-corp later?
Yes. Many owners start as a default LLC and elect S-corp status once profit justifies it. The election is generally due within 75 days of the start of the tax year you want it to apply to, though late-election relief is often available.
Does an S-corp lower my income tax too?
Not directly. The S-corp election primarily saves self-employment/payroll tax. Your income tax is driven by total profit and deductions, including the 20% QBI deduction, which is why salary level needs to be set with the whole picture in view.
What is a “reasonable salary” for an S-corp owner?
It is the wage you would have to pay someone with your skills to do your role. There is no single formula, it depends on your industry, location, hours, and duties. We benchmark it and document the reasoning so it holds up under scrutiny.
Key takeaways
- LLC is a legal structure; S-corp is a tax election, you can have both.
- S-corp savings come from splitting profit into salary (taxed) and distributions (not subject to SE tax).
- The election usually pays off above roughly $50k–$80k of profit beyond your salary.
- Salary must be “reasonable,” and the election adds payroll, a separate return, and compliance cost.
- Run the actual numbers, retirement, QBI, and Michigan’s FTE election all interact.
This article is general information, not tax advice for your specific situation. Tax rules change and the right structure depends on your full financial picture. Talk to a qualified advisor before making an entity election.
