What is the difference between an LLC and an S-corp for taxes?

The LLC vs. S-corp question is really a question about how self-employment and payroll taxes apply to your business income. Both structures pass income through to owners' personal returns — neither pays corporate-level federal income tax (unlike a C corporation). The difference is in how the IRS treats the income before it lands on your return. This is educational; consult a CPA or business attorney before restructuring.

LLC (default): all net profit subject to SE tax

A single-member LLC is a disregarded entity for federal tax purposes — it files no separate return; all net business income flows to Schedule C on the owner's Form 1040. That net income is subject to self-employment (SE) tax at 15.3% (up to the Social Security wage base, plus 2.9% Medicare on everything above). A multi-member LLC is taxed as a partnership by default, with partners also owing SE tax on their distributive share of active income.

S-corp: salary + distributions split

An S-corp also passes income through to shareholders, but owner-employees must pay themselves a reasonable salary — which is subject to payroll taxes (FICA: the same 15.3% split between employer and employee). Remaining profits distributed above that salary are not subject to self-employment or payroll taxes. This creates a potential tax savings: if your business earns $150,000 and you pay yourself a reasonable salary of $80,000, only the $80,000 is subject to payroll taxes — the $70,000 distribution is not. The IRS watches closely for S-corps that set artificially low salaries to avoid payroll taxes; the salary must be reasonable for the work performed. See IRS guidance on S-corp reasonable compensation.

Costs and complexity of S-corp status

• S-corp election requires filing IRS Form 2553 (generally by March 15 of the tax year).
• S-corps file a separate federal business tax return (Form 1120-S), adding complexity and accounting cost.
• Payroll must be run (quarterly payroll tax deposits, W-2s for owner-employees), increasing administrative overhead.
• S-corps have eligibility restrictions: max 100 shareholders, all must be U.S. citizens/residents, one class of stock only.
• State-level treatment varies — some states charge S-corps a franchise or excise tax regardless of federal pass-through treatment.

When does the S-corp switch typically make sense?

A common CPA rule of thumb is that the payroll-tax savings from an S-corp election start to exceed the additional accounting and compliance costs when net self-employment income is roughly $50,000–$80,000 per year — though this varies widely by state, income level, and operating expenses. The crossover point is not a universal number; it depends on your specific situation. A CPA with small-business experience can model the breakeven for you.

S-corp and business financing

From a lender's standpoint, an S-corp is a recognized legal entity with its own EIN and tax filings (Form 1120-S), which supports building a separate business credit profile. Lenders will typically look at both the business return and the owner's personal return. If your S-corp is ready to grow, apply with ClearValue Lending — one application routes to the funding partners best matched to it. This is not legal or tax advice; work with a CPA or attorney before electing S-corp status.