S-Corp vs. LLC: Choosing the Right Entity to Cut Self-Employment Tax
Your business entity is not just a legal formality — it directly drives how much self-employment tax you pay. Here is how the S-election can save owners tens of thousands per year.
A single-member LLC taxed as a sole proprietorship is simple, but every dollar of net profit is subject to the 15.3% self-employment tax. For a business earning $200,000 in profit, that is over $30,000 in SE tax alone — much of which can be reduced with the right entity election.
How the S-election changes the math
When an LLC elects to be taxed as an S corporation, the owner splits income into two streams: a reasonable salary (still subject to payroll taxes) and a profit distribution (not subject to self-employment tax). The distribution portion is where the savings live.
- Reasonable salary must reflect market compensation for the role you perform
- Distributions above that salary avoid the 15.3% SE/payroll tax
- Both salary and distribution still flow to your personal return as ordinary income
- The structure must be maintained with actual payroll — not just bookkeeping entries
After restructuring entities and compensation, one multi-business owner cut their effective tax rate from 34% to 19% — savings that compounded across every company they owned.
When the S-election makes sense
The strategy generally pays off once profits consistently exceed what a reasonable salary would be — often around $80,000–$100,000 in net profit. Below that threshold, the cost and complexity of running payroll can outweigh the savings.
It is not only about SE tax
Entity choice also affects retirement plan options, the qualified business income (QBI) deduction, fringe benefits, and how you are positioned for future exit or estate planning. The right structure is the one that optimizes the whole picture — not just one line item.
Common mistakes
- Setting salary artificially low to maximize distributions (an audit red flag)
- Forgetting to run actual W-2 payroll through the S-corp
- Ignoring the impact on retirement contributions and QBI
- Choosing an entity once and never revisiting it as the business grows
Find the structure that fits your business
Entity structuring is one of the fastest ways to reduce tax legally — but it has to be done correctly and revisited as your income grows. Book a free discovery call to learn how entity structuring works and whether a Comprehensive Consultation fits your business.
Disclaimer: This article is provided for educational purposes only and does not constitute tax, legal, or financial advice. Tax strategies depend on your individual circumstances. Consult a qualified professional before acting on anything described here.
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