S-Corp Tax Advantages Every LLC Owner Should Know

"Are you trying to make 2025 the tax year that you started as an S-Corp?"

I asked this during an onboarding call with a client who mentioned they'd filed for S-Corp election. They were waiting on approval—and rightfully so. The tax savings can be substantial.

But a lot of LLC owners don't even know this option exists. They're leaving money on the table every single year.

The Self-Employment Tax Problem

When you run a business as a sole proprietor or standard LLC, you pay self-employment tax on all of your net business income. That's 15.3%—12.4% for Social Security and 2.9% for Medicare—on top of your regular income tax.

On $100,000 of profit, that's $15,300 in self-employment tax alone. It adds up fast.

The S-Corp election exists specifically to reduce this burden.

How S-Corp Taxation Works

An S-Corp isn't a different type of company—it's a tax election. You keep your LLC structure, but you tell the IRS to tax you differently.

The key difference: as an S-Corp, you split your income into two buckets.

Bucket 1: Salary. You pay yourself W-2 wages as an employee of your own company. These wages are subject to payroll taxes (the employer/employee version of self-employment tax).

Bucket 2: Distributions. Any profit beyond your salary can be taken as a distribution. Distributions are not subject to that 15.3% self-employment tax.

That's the whole trick. Same money, different tax treatment.

The Math In Practice

Let's say your business nets $150,000.

As a standard LLC: You pay 15.3% self-employment tax on all of it. That's about $22,950 in SE tax, plus your income tax on top.

As an S-Corp: You pay yourself a $70,000 salary. Payroll taxes on $70,000 run about $10,710. The remaining $80,000 comes out as a distribution—no SE tax.

You just saved over $12,000.

The exact numbers vary based on your specific situation, but the pattern holds: S-Corp election can save you thousands annually once your income reaches a certain threshold.

When It Makes Sense

The tax benefits of S-Corp status start making sense when your net business income consistently hits around $50,000 or more.

Below that, the added costs and complexity might not be worth it. S-Corps require:

• Running payroll (for yourself, at minimum)
• Paying quarterly payroll taxes
• Filing additional tax forms
• Sometimes additional state fees or franchise taxes

These costs typically run $1,000-$3,000 per year. If your tax savings exceed that, S-Corp makes sense. If not, stay a standard LLC and revisit next year.

The sweet spot is usually somewhere between $50,000 and $150,000 in net income—high enough for meaningful savings, not so high that other strategies become relevant.

The Reasonable Compensation Requirement

Here's where people get in trouble: the IRS requires you to pay yourself a "reasonable" salary.

You can't pay yourself $20,000 and take $180,000 in distributions. The IRS specifically audits S-Corps looking for unreasonably low salaries. If they catch you, they'll reclassify your distributions as wages, charge back taxes, and add penalties.

What's "reasonable"? Generally, what someone doing your job in your market would make. If you're a plumber doing $300,000 in revenue, you probably need to pay yourself something close to what a plumber with your experience would earn as an employee—maybe $60,000-$90,000 depending on your area.

A good rule of thumb is paying yourself 40-60% of your net income as salary, depending on your industry and role. But get real guidance from a CPA on this—it matters.

How to Elect S-Corp Status

If you're already an LLC, you don't need to form a new company. You file Form 2553 with the IRS to elect S-Corp treatment.

The catch: there's a deadline. To have S-Corp status apply to the current tax year, you need to file by March 15. If you miss it, you can request late election relief, but it's not guaranteed.

For the client I mentioned earlier, they filed in time for 2025. Once approved, their tax situation changes immediately—lower self-employment taxes on the same income.

State-Level Considerations

Some states have additional taxes or fees for S-Corps.

California charges a minimum $800 franchise tax, plus 1.5% on net income. New York City has its own considerations. A few other jurisdictions can eat into your savings.

Before electing S-Corp, understand what your state charges. In most cases, the federal savings still outweigh state costs—but run the numbers.

The Kids and Family Angle

Here's a bonus strategy my client mentioned: if you have kids working in your business, S-Corp status opens up additional planning options.

You can pay your kids legitimate wages for legitimate work they do (filing, cleaning, helping with jobs, social media—whatever they actually do). Those wages are tax-deductible for the business and taxable to the kid at their rate, which is usually zero or very low.

This shifts income from your high bracket to their low bracket, while also giving them earned income they could put into a Roth IRA.

The rules are specific and you need to document everything properly, but it's a real strategy that real families use.

Talk to Your CPA

I'm not a tax professional, and this isn't tax advice. S-Corp election has real implications and requires proper setup.

But here's what I know: a lot of small business owners are overpaying taxes because they don't know about S-Corp or think it's too complicated.

If you're making $50,000+ in profit as an LLC and you haven't talked to your CPA about S-Corp election, put it on your list. The conversation takes 30 minutes. The savings could be $5,000-$15,000 per year.

That's real money. Don't leave it on the table.