LLC vs S-Corp for a Service Business: The Tax Math at $150K $400K $1M

This is general information, not tax or legal advice. Entity and tax choices depend on your specifics and change with the law — work with a CPA and attorney before deciding.

First, LLC and S-Corp aren’t the same kind of thing

An LLC is a legal entity (liability protection, formed with the state). An S-Corp is a tax election — an LLC (or corporation) can elect to be taxed as an S-Corp. So the real question is usually: “Should my LLC be taxed as a default LLC or as an S-Corp?” Both give liability protection; the difference is how you’re taxed (forming an entity also helps business credit).

The core tax difference

• Default LLC: all net profit is subject to self-employment tax (Social Security + Medicare) on top of income tax. Simple, but that SE tax stings as profit grows.
• S-Corp election: you pay yourself a reasonable salary (subject to payroll taxes), and remaining profit can be taken as distributions not subject to SE/payroll tax — potentially saving thousands. The trade-off: payroll, more paperwork, and the IRS requires that salary be genuinely reasonable.

The math as profit grows

Illustrative only — real savings depend on your salary, state, and situation.

• ~$150K profit: S-Corp can start to pay off. The SE-tax savings on distributions often exceed the added payroll/admin cost — frequently the point where the election begins to make sense.
• ~$400K profit: the S-Corp advantage typically grows clearly, since a larger share can be distributions above a reasonable salary — savings can be substantial.
• ~$1M profit: the tax structure matters a lot; most businesses at this level are well past the point where an S-Corp election (or more advanced planning) is worth it — get real professional advice here.

The pattern: at low profit the S-Corp’s extra cost/complexity may not be worth it; as profit climbs, the SE-tax savings increasingly outweigh it. There’s a crossover point, and a CPA can pinpoint yours.

Beyond taxes

• Administrative burden: S-Corp means payroll, a separate return, and stricter formalities.
• Reasonable salary requirement: pay yourself too little and the IRS can reclassify distributions — don’t game it.
• State rules and fees vary and can change the math.
• Clean books make either work and any election easier (chart of accounts).

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