S-corp or LLC: the numbers that decide it

A default LLC is taxed as a sole proprietorship or partnership, and every dollar of profit is subject to self-employment tax — 15.3% on top of income tax. Electing S-corp status lets you split income into a reasonable salary (subject to payroll tax) and a distribution (which is not), which can meaningfully lower your tax bill once profit clears a certain threshold.

The tradeoff is complexity: an S-corp requires running payroll, filing a separate 1120-S return with K-1s, and justifying that your salary is 'reasonable' for the work you do — the IRS scrutinizes this specifically. Between the payroll service, the additional return, and the bookkeeping it requires, expect $2,000–$4,000 a year in added overhead.

As a rule of thumb, the self-employment tax savings from an S-corp election tend to outweigh that overhead once net profit is consistently above roughly $60,000–$80,000 a year. Below that, the extra filings usually are not worth it. We run the numbers on your actual profit before recommending either way.