By default, an LLC's income passes through to the owner's personal return and the entire net profit is subject to self-employment tax. An S-corp also passes income through, but lets owner-employees split income between a reasonable salary (subject to payroll taxes) and distributions (not subject to self-employment tax) — potentially reducing the payroll tax burden. This is educational content; consult a CPA or attorney before changing your entity structure.
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.
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.
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.
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.
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 one matched lender partner. This is not legal or tax advice; work with a CPA or attorney before electing S-corp status.