LLC vs. S Corp in 2025: Which Saves More in Taxes — and Why It Matters

Many small‐business owners type “should I form an LLC or S corp” into Google — and for good reason. Your decision impacts how much you pay in self-employment taxes, what deductions you can claim, and how you report income. This fresh roadmap outlines everything you need to know, without repeating the same old advice.

1. Why Business Structure Affects Self-Employment Taxes

An LLC treated as a sole proprietorship or partnership passes all net profits through to your personal tax return. You pay 15.3% self-employment tax on the entire amount.
An S Corp, on the other hand, lets you divide income into:

  • A W-2 salary (subject to payroll taxes)

  • Remaining profits (distributions) that are not subject to self-employment tax

This structure can reduce your tax bill significantly — but only if done by the rules.

2. How to Elect S Corp Status for an LLC

To convert your LLC into an S Corp for tax purposes:

  • Form an LLC under your state law and apply for an EIN.

  • File IRS Form 2553 by March 15 to be treated as an S Corp for the current tax year.

  • Set up payroll and pay yourself a regular, reasonable salary.

  • File quarterly payroll reports and issue a W-2 at year-end.

  • Keep corporate minutes that document salary and shareholder decisions.

3. Setting a Reasonable Salary — the IRS Is Watching

The IRS wants your salary to match your role and responsibilities. Too low, and you risk an audit. Too high, and you undercut your tax savings.

To determine a fair number:

  • Look up industry averages in your area.

  • Factor in your experience and workload.

  • Document your rationale in case of future review.

For example, a freelance developer in Texas earning $150,000 may justify a $70,000 salary with the rest taken as distributions.

4. Real Case: How One Freelancer Saved Over $15,000

Marisol, a graphic designer in Denver, made $180,000 in 2024. Here’s how her tax looked:

  • LLC Default: Full income taxed for self-employment — $27,540

  • S Corp: Paid herself $75,000 salary ($11,475 in payroll taxes) + $105,000 in distributions (tax-free from self-employment)

  • Net Savings: $16,065 minus $600 payroll fees = $15,465 saved

That’s money she reinvested into business growth.

5. LLC vs. S Corp: Pros and Cons at a Glance

LLC
Pros: Flexible setup, fewer formalities
Cons: Self-employment tax on all profits

S Corp
Pros: Major tax savings, fringe benefit options, cleaner for investors
Cons: Requires payroll, stricter documentation, shareholder limitations

6. Extra Perks for S Corps You Might Not Know

  • Health Insurance: If you own more than 2%, premiums can be deducted on your Form 1040

  • Retirement Plans: Solo 401(k) or SEP-IRA contribution limits may increase

  • QBI Deduction: W-2 wages can help increase your 20% pass-through deduction under Section 199A

7. Common Mistakes That Trigger IRS Problems

  • Missing the Form 2553 deadline

  • Paying yourself an unreasonably low salary

  • Failing to account for state-level payroll tax obligations

  • Skipping proper corporate records or meeting minutes

If these steps aren’t followed properly, the IRS may revoke your S Corp status or reclassify your income — nullifying your savings.

If your business brings in over $100,000 in net income and you’re willing to handle payroll, the S Corp election can offer real, recurring tax benefits. But if you're just starting out or your income is still modest, the simplicity of a regular LLC might better serve you.

Legal and Tax Disclaimer:
This article is for informational purposes only and does not constitute legal or tax advice. Tax laws and business requirements may vary by state and individual situation. Please consult with a certified accountant or business attorney before making structural changes to your company.

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