LLC vs. S Corp: Which One Saves You More on Taxes?

When you start or grow a business, one of the most important decisions you’ll make is how to structure it — not just legally, but for tax purposes. Many small business owners begin with a Limited Liability Company (LLC) because it’s flexible and easy to set up. But as income grows, an important question comes up: Should I switch to an S Corporation (S Corp) to save on taxes?

With the recent tax law updates under the One Big Beautiful Bill (OBBB), this question matters more than ever. The right choice could save you thousands — year after year. So let’s take a closer look.

The Basics: What’s the Difference Between an LLC and an S Corp?

An LLC is a legal structure — it provides liability protection, separating your personal assets from your business debts. By default, a single-member LLC is taxed like a sole proprietorship, and a multi-member LLC is taxed like a partnership. In both cases, all profits “pass through” to the owners and are reported on personal tax returns.

An S Corporation, on the other hand, is a tax election, not a business type. You can actually be an LLC and choose to be taxed as an S Corp. The key benefit? The ability to split your income between salary and distributions — and only the salary portion is subject to self-employment (payroll) taxes. This is where the savings start to add up.

Where the Tax Savings Come From

Here’s how it works in practice. Let’s say you earn $120,000 in net business income. As an LLC taxed as a sole proprietorship, you’d pay 15.3% self-employment tax on the full $120,000 — that’s $18,360, before income tax is even calculated.

If you’re an S Corp, you can pay yourself a reasonable salary — say, $60,000 — and take the remaining $60,000 as a distribution, which is not subject to self-employment tax. In that case, you’d only pay $9,180 in payroll taxes, cutting your tax bill by over $9,000.

These savings grow with your income. For many business owners, the switch to S Corp status starts to make sense once they reach around $80,000–$100,000 in net profit annually.

Real-World Example: Freelance Designer Saves Over $13K

Consider Jessica, a freelance graphic designer who earns about $150,000 in net profit. She initially operated as a single-member LLC, paying over $22,000 in self-employment tax. With our tax advisor’s help, she elects S Corp status and begins paying herself a $70,000 salary.

The remaining $80,000 is treated as a distribution — saving her more than $13,000 annually in payroll taxes. Yes, she now needs to run payroll and file an additional tax return (Form 1120-S), but the annual savings far outweigh the administrative burden.

What About the QBI Deduction?

One of the big wins under the One Big Beautiful Bill is the permanent extension of the 20% Qualified Business Income (QBI) deduction for pass-through entities.

Both LLCs and S Corps can qualify for this deduction — as long as the business falls under income thresholds and is not in a restricted “specified service trade or business” (like law or accounting). In fact, S Corps often have more flexibility in maximizing QBI, since wages can be controlled to influence the final deduction amount.

Bottom line: if you’re eligible, the QBI deduction can reduce your taxable income by 20% — no matter which structure you choose.

But Is an S Corp Right for Everyone?

Not always. There are some important trade-offs to consider:

• You must run payroll, which means using payroll software or hiring a provider.

• You’ll need to file a separate corporate tax return each year.

• You are required to pay yourself a “reasonable salary” based on industry standards — too low, and you risk IRS scrutiny.

• More structure = more bookkeeping and compliance.

For early-stage businesses or side hustles earning under $50,000, staying with a basic LLC setup might be simpler and more cost-effective — at least for now.

Your Tax Strategy Matters

Your business structure isn’t just a legal formality — it’s a powerful tax tool. And in a post-OBBB world, choosing the right one can give you a real edge. If you’re a business owner making solid profits and still operating as a sole proprietor or single-member LLC, it’s time to run the numbers. The difference could be thousands of dollars in your pocket every year.

Choosing the right structure is one of the most important tax decisions you’ll make as a business owner. An S Corp can unlock serious tax savings once your income hits a certain threshold — but it requires compliance, planning, and proper setup.

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