Lesson 3 of 11
LLC taxation vs S corporation taxation
The comparison is between self-employment tax on all business profit and employment taxes on a reasonable salary only.
Default LLC treatment
A single-member LLC is disregarded and a multi-member LLC is taxed as a partnership. Active owners generally pay self-employment tax on their share of the profit, on top of income tax.
With the S election
The owner takes a reasonable salary subject to employment taxes. Remaining profit is distributed and is generally not subject to self-employment tax, though income tax still applies.
The offsetting costs
- Payroll processing, filings and employer payroll taxes
- A separate business tax return, Form 1120-S
- Higher accounting fees and more bookkeeping discipline
- State-level S corporation taxes or fees in some states
A rough test many advisers use is whether profit exceeds a reasonable salary by enough that the tax saved clearly beats the extra payroll and accounting cost. Run your own numbers with a tax professional rather than relying on a rule of thumb.
Not sure whether the election fits?
The numbers depend on your profit, your role in the business and your state. Gullia Filing's tax team reviews your position, prepares Form 2553 where it makes sense, and sets up payroll so the election holds up.