S-Corp vs LLC: Which Saves More Tax at $100K-$300K?

The single most repeated question in our tax practice: 'Should I be an S-Corp?' The honest answer is 'probably yes, but later than you think.' Here is the math and the trap.

The mechanical difference

An LLC defaults to pass-through taxation - all net income hits Schedule C and is subject to 15.3% self-employment (SE) tax up to the Social Security wage base. An S-Corp election splits your income into a reasonable W-2 salary (subject to payroll tax) and distributions (NOT subject to SE tax). That second bucket is where the savings live.

Real numbers at $150K net

Assume $150,000 net income, single owner, Georgia resident.

• LLC (Schedule C): ~$21,000 SE tax + federal/state income tax.
• S-Corp with $70,000 reasonable salary: ~$10,700 payroll tax. Saves ~$10,300 in SE tax.
• Subtract S-Corp running costs: payroll service ($600/yr), separate 1120-S return ($800-$1,500/yr), bookkeeping rigor (+$1,200/yr).
• Net annual benefit: roughly $7,000-$8,000.

The break-even

Below ~$60,000 net income, the running costs of the S-Corp eat the savings. Between $60K and $100K, it is roughly a wash. Above $100K, the S-Corp pulls clearly ahead. Above $200K, the case is overwhelming - assuming you actually run payroll and document a reasonable salary.

The trap: 'reasonable compensation'

The IRS scrutinizes S-Corps that pay the owner $20K salary and $130K distributions. They will reclassify and assess back payroll tax plus penalties. Document the salary with a written reasonable-compensation analysis tied to industry comp surveys. We include this with every S-Corp formation.

When to start as an LLC instead

If you might raise venture capital, plan to add foreign owners, want flexible profit-sharing, or expect losses in the first two years, stay an LLC for now. You can elect S-Corp status later via Form 2553. Going the other direction is painful.

How we decide for clients

Free 30-minute call, we ask three questions (net income, owner-comp expectations, growth plan), and we tell you which entity wins on a one-page schedule. Book it here.