LLC vs. S-Corp
These aren't two different choices. S-corp is a tax election you make for your LLC. The question is whether the math makes sense for where your business is right now.
Most women who ask “should I have an LLC or an S-corp?” are asking the wrong question. An S-corp is not a competing structure. It’s a tax election you file with the IRS to change how your existing LLC is taxed. You form the LLC first, then decide whether to tell the IRS you want it taxed as an S-corp. The real question is: does that election save you more money than it costs?
The answer depends entirely on how much your business earns.
How a Default LLC Is Taxed
When you run a single-member LLC and take no special elections, all of your net profit flows to your personal tax return as self-employment income. You pay self-employment tax on every dollar of it.
Self-employment tax is 15.3% on the first $168,600 in net earnings (2024) and 2.9% above that. As a W-2 employee at a traditional job, your employer covers half of this. As the owner of a default LLC, you cover all of it.
On $80,000 in net profit, that’s roughly $12,000 in self-employment tax before you’ve paid a dollar of federal or state income tax.
What the S-Corp Election Actually Does
An S-corp election lets you split your income into two buckets: a salary (subject to payroll taxes) and distributions (not subject to self-employment tax).
Here’s what that looks like in practice. You make $80,000 in net profit. You pay yourself a $50,000 salary, which means payroll taxes apply to $50,000. The remaining $30,000 comes out as a distribution, and the IRS does not touch it with self-employment tax. You just avoided 15.3% on $30,000, which is roughly $4,590.
That’s not free money. You’ll spend some of it on the infrastructure required to make this work. But for businesses earning enough, the net savings are real.
Side-by-Side Comparison
| Default LLC | LLC with S-Corp Election | |
|---|---|---|
| SE tax applies to | All net profit | Salary portion only |
| Payroll required | No | Yes |
| Tax return type | Schedule C (or Form 1065 for multi-member) | Form 1120-S |
| Extra accounting cost | Lower | $1,000-2,000/year more |
| Makes sense when | Net profit under ~$50,000 | Net profit over $60,000-80,000 |
The Reasonable Salary Requirement
The IRS is not naive about this. They specifically scrutinize S-corp owners who pay themselves artificially low salaries to push more income into the distribution bucket and dodge payroll taxes.
The standard is “reasonable compensation,” which means: what would you have to pay someone else to do your job? A UGC creator making $100,000 in brand deal income can’t put herself on a $10,000 salary to make most of it a distribution. She’d need to pay herself somewhere in the $50,000-80,000 range to pass a basic audit test. If she pays a below-market salary and gets audited, the IRS can reclassify the distributions as wages and hit her with back taxes and penalties.
The savings come from the gap between your reasonable salary and your total income, not from paying yourself as little as possible.
The Actual Cost of Making This Work
Running an S-corp election means running actual payroll. You’ll need payroll software like Gusto or Rippling, which costs $50-200 per month for a single employee (you). You’ll also need to file Form 1120-S, a corporate tax return that most CPAs charge $500-1,500 more for than a standard Schedule C return.
Add it up and the overhead runs roughly $1,500-3,500 per year depending on your accountant and payroll provider. That’s the bar your SE tax savings need to clear before this makes financial sense.
When Not to Do It
Three scenarios where the S-corp election is the wrong move:
Under $50,000 in net profit. The SE tax savings won’t exceed the extra accounting and payroll costs. Do the math before filing anything.
California. California charges S-corps 1.5% of net income with an $800 minimum, on top of the standard LLC franchise tax. That extra layer can eat most of what you’d save on self-employment tax for lower-earning businesses.
Complex multi-member ownership. S-corps have strict ownership rules: no more than 100 shareholders, only one class of stock, no foreign owners. If your ownership structure is complicated, the constraints may not be worth the savings.
A Real Example: UGC Creator, $90K Net
A UGC creator in her third year of business is making $90,000 in net profit through her single-member LLC, entirely from brand deal payments. She’s been paying full self-employment tax on all of it, roughly $13,700 per year.
Her accountant runs the numbers. A reasonable salary for her role is around $55,000. She pays herself that through payroll, takes the remaining $35,000 as distributions. SE tax on $55,000 is roughly $8,415. She just avoided SE tax on $35,000, saving $5,355 gross.
Subtract $1,200 for payroll software and $1,500 for the upgraded tax return: net savings of $2,655 in year one. Not transformational, but real. By year three, if her income grows to $120,000 and her salary stays at $65,000, she’s clearing $6,000-7,000 in net annual savings. The overhead stays flat while the savings grow.
She files Form 2553, the election takes effect for that tax year, and she doesn’t touch it again unless something changes.
Timing: When to File Form 2553
The election is not automatic. You file Form 2553 with the IRS, and timing matters.
To have the election apply to the current tax year, you must file within 75 days of the start of that tax year (for most businesses, by March 15 if your fiscal year follows the calendar year). You can also file within 75 days of forming the LLC if you’re doing it at the start.
Miss the window and the election takes effect the following tax year. There’s a late election relief process, but it requires showing reasonable cause for the delay.
If you’re already mid-year and the numbers make sense, file immediately and ask your accountant whether late election relief applies. Don’t wait until January when you can probably still get this year covered.
The Bottom Line
The S-corp election is a tax tool with real overhead, real compliance requirements, and a meaningful savings threshold. Below $50,000 in net profit, it almost never makes financial sense. Above $80,000-100,000, it almost always does. In between, you run the actual numbers with a CPA who has done this before.
Form the LLC first. Then, when the income is there, revisit the election. It’s not a once-and-done decision — it’s a question you ask every few years as your income grows.
Sources
- IRS, “S Corporations,” updated 2024. Overview of S-corp requirements, shareholder limits, and election procedures.
- IRS, “Instructions for Form 2553,” 2024. Filing deadlines and late election relief procedures.
- IRS, “Self-Employment Tax (Social Security and Medicare Taxes),” 2024. 2024 wage base and rate breakdown.
- IRS, “S Corporation Compensation and Medical Insurance Issues,” updated 2023. Reasonable compensation requirements and IRS enforcement posture.
- California Franchise Tax Board, “S Corporations,” 2024. California 1.5% net income tax and $800 minimum on S-corps.
- Social Security Administration, “2024 Social Security Changes”. $168,600 Social Security wage base for 2024.