The core difference comes down to self-employment taxes. Both LLCs and S-Corps are pass-through entities, meaning profits flow to your personal return and get taxed at your individual rate. The distinction is how those profits get treated for Social Security and Medicare taxes.

A single-member LLC is taxed as a sole proprietorship by default. All net income is subject to self-employment tax at 15.3% on the first $168,600 (2024 limit) and 2.9% above that. If your LLC earns $200,000 in profit, you pay self-employment tax on the entire amount.

An S-Corp requires you to pay yourself a reasonable salary as a W-2 employee. You pay payroll taxes on that salary, but distributions above the salary are not subject to self-employment tax. If that same $200,000 business pays you a $100,000 salary and distributes $100,000, you only pay payroll taxes on the $100,000 salary. The distribution passes through without the additional 15.3%.

The catch is “reasonable salary.” The IRS expects S-Corp owners to pay themselves what they would earn doing similar work for someone else. You cannot pay yourself $30,000 when the market rate for your role is $120,000. The IRS looks at industry norms, your qualifications, and how much time you spend in the business. Getting this wrong triggers audits and back taxes.

S-Corps also come with compliance costs that LLCs avoid. You need to run payroll, file quarterly payroll returns, and file a separate S-Corp tax return (Form 1120-S) in addition to your personal return. These requirements add $2,000 to $5,000 or more in annual accounting and payroll costs depending on complexity.

The math usually favors S-Corp election when your business consistently profits above $60,000 to $80,000 after paying yourself a reasonable salary. Below that threshold, the tax savings rarely justify the added compliance burden. Professional services businesses with high margins and low overhead often benefit most from S-Corp taxation because a larger share of revenue flows to profit.

One important point: LLC and S-Corp are not mutually exclusive. An LLC can elect to be taxed as an S-Corp by filing Form 2553 with the IRS. You keep the liability protection of your LLC while getting the tax treatment of an S-Corp. Most small businesses that want S-Corp taxation do it this way rather than forming an actual S-Corporation.

The decision depends on your specific numbers. Boca Raton advisory services can model both scenarios using your actual income and expenses to show whether the tax savings justify the additional cost and complexity. The answer varies significantly based on your profit level, what constitutes reasonable compensation in your industry, and how much you value administrative simplicity.