LLC vs S-Corp Tax Calculator 2025 – Business Structure Comparison
Compare LLC and S-Corp tax implications for your business. Calculate self-employment tax savings and determine the optimal structure for 2025.
LLC vs S-Corp Tax Calculator 2025 – Business Structure Comparison
Introduction
Choosing between an LLC and S-Corp isn't about legal structure—it's about tax strategy. Both offer liability protection, but an S-Corp election can save you $5,000-$15,000+ annually in self-employment taxes if your business is profitable enough.
The LLC vs S-Corp Tax Calculator helps you determine which structure minimizes your tax bill based on your business income and personal situation.
Key Difference: Self-Employment Tax
LLC (Default Taxation)
All profit is subject to 15.3% self-employment tax (Social Security + Medicare).
Example: $100,000 profit
- Self-Employment Tax: $15,300
- Income Tax: ~$18,000 (24% bracket)
- Total Tax: ~$33,300
S-Corp
Only W-2 salary is subject to employment taxes. Remaining profit distributes as dividends (no SE tax).
Example: $100,000 profit, pay yourself $60,000 W-2
- Employment Tax (employer + employee): $60,000 × 15.3% = $9,180
- Income Tax: ~$18,000
- Total Tax: ~$27,180
- Savings: $6,120/year
The Break-Even Point
General Rule: S-Corp makes sense at $60,000-$80,000+ profit.
Below this, compliance costs outweign tax savings.
Cost-Benefit Analysis
| Profit Level | LLC Tax | S-Corp Tax | S-Corp Savings | Worth It? |
|---|---|---|---|---|
| $40,000 | $6,120 | $6,120 | $0 | No |
| $60,000 | $9,180 | $7,650 | $1,530 | Marginal |
| $80,000 | $12,240 | $9,945 | $2,295 | Yes |
| $100,000 | $15,300 | $11,475 | $3,825 | Yes |
| $150,000 | $18,228* | $14,535 | $3,693 | Yes |
*Caps at Social Security wage base
S-Corp Compliance Costs
- Payroll Service: $500-$1,500/year
- Additional Tax Prep: $500-$2,000
- State Fees: $0-$800/year
Total: $1,000-$4,300/year
Bottom Line: Need to save \u003e$2,000/year to justify S-Corp.
Reasonable Compensation Requirement
IRS Rule: You must pay yourself "reasonable compensation" as W-2 before taking distributions.
"Reasonable" = Market rate for your role
Examples
Scenario 1: Consultant making $120,000 profit
- Reasonable salary: $70,000-$80,000
- Distributions: $40,000-$50,000
Scenario 2: E-commerce business making $200,000
- Reasonable salary: $60,000-$80,000 (if you're the only operator)
- Distributions: $120,000-$140,000
Red Flag: $150,000 profit, $20,000 salary → IRS will reclassify distributions as wages.
When S-Corp Makes Sense
✅ Good Fit
- Consistent profit \u003e$80,000/year
- Service-based business (consulting, freelancing)
- You're the primary income generator
- Low overhead, high margin
❌ Poor Fit
- Inconsistent income (\u003c$60k some years)
- Lots of employees (already have payroll)
- Passive real estate (rental income doesn't qualify)
- Planning to raise VC (C-Corp better)
State-Specific Considerations
California
Extra Tax: 1.5% S-Corp tax on net income
- Minimum: $800/year franchise tax
- Makes S-Corp less attractive
Texas, Florida, Nevada
No state income tax: S-Corp saves MORE (only federal SE tax reduced)
New York, New Jersey
High state taxes: S-Corp savings partially offset by state payroll taxes
How to Elect S-Corp Status
New LLC
- Form LLC with state
- File Form 2553 with IRS within 75 days
- Set up payroll
Existing LLC
- File Form 2553 by March 15 for current-year election
- Or file anytime for next-year election
Revocation: Can switch back to LLC, but there's a 5-year waiting period to re-elect.
S-Corp Pitfalls
Mistake 1: Forgetting Payroll
Must run payroll at least quarterly (ideally monthly). Missed payroll = IRS penalties.
Mistake 2: Taking Only Distributions
Can't skip salary and take 100% distributions. IRS will recharacterize.
Mistake 3: Underpaying Yourself
$200k profit, $30k salary = audit risk. Pay market rate.
Mistake 4: Not Considering State Rules
Some states (CA, NY, NJ) have extra S-Corp taxes or fees that reduce federal savings.
FAQ
Q: Can I be a single-member S-Corp? A: Yes, S-Corps can have 1-100 shareholders.
Q: What if my income varies year to year? A: S-Corp works best with consistent income. If you have wildly variable years, LLC may be simpler.
Q: Can I switch from LLC to S-Corp mid-year? A: No, effective date is January 1 of election year (unless filing late election relief).
Q: Do I need a separate business bank account? A: Yes, critical for S-Corps to maintain corporate formality and avoid piercing the veil.
Q: Can my spouse be on payroll? A: Yes, if they perform legitimate work. Can help fund spousal IRA.
Q: What about health insurance? A: S-Corp owners can deduct premiums as a business expense, then it's added back to W-2 (wash, but allows above-the-line deduction).
Related Calculators
- Self-Employment Tax Calculator: /calculator/062-take-home-pay-calculator-2025
- Freelance Rate Calculator: /calculator/124-freelance-rate-calculator-2025
- Business Break-Even Calculator: /calculator/109-break-even-point-calculator-2025
Conclusion
S-Corp election is a powerful tax tool for profitable small businesses, but it's not automatic. You need consistent profit above $60-80k and willingness to handle payroll compliance.
Use the LLC vs S-Corp Tax Calculator to run your numbers. If you're saving \u003e$3,000/year after compliance costs, S-Corp is likely worth it. Consult a CPA to ensure reasonable compensation and proper setup.