By Jake Lawson, LLC Formation Strategist
Short answer: No, an LLC is not an S Corp. They’re completely different things. But here’s where it gets confusing—an LLC can choose to be taxed like an S Corp. It’s like asking “Is a Honda a racing car?” Well, no, but you can race a Honda if you want to.
After helping over 1,200 entrepreneurs navigate business formation and tax elections, I can tell you this is the most common confusion I encounter. Let me clear this up once and for all, then help you figure out which approach actually makes sense for your business.
The Fundamental Difference: Entity vs. Tax Election
Here’s the core concept you need to understand:
LLC = Legal Entity (Formed with the State)
- What it is: A business structure you create by filing paperwork with your state
- Where you form it: Secretary of State’s office
- What it provides: Legal protection, business credibility, operational flexibility
- Cost: $50-$500 depending on your state
S Corp = Tax Election (Made with the IRS)
- What it is: A tax treatment choice you make with the federal government
- Where you elect it: Internal Revenue Service (Form 2553)
- What it provides: Potential tax savings on self-employment taxes
- Cost: Additional payroll and accounting expenses
The key insight: You can have an LLC that elects S Corp tax treatment. You’re not changing your business structure—you’re just changing how the IRS taxes your profits.
How the IRS Actually Treats LLCs
Here’s something that surprises most entrepreneurs: The IRS doesn’t have a special “LLC tax category.” Instead, it forces LLCs into existing tax buckets:
Single-Member LLC Default Treatment
Default tax status: Sole proprietorship (disregarded entity) What this means:
- LLC doesn’t file its own tax return
- You report LLC income/expenses on your personal Form 1040
- You pay self-employment tax on all profits (15.3%)
Multi-Member LLC Default Treatment
Default tax status: Partnership What this means:
- LLC files Form 1065 (informational return)
- LLC issues K-1s to each member
- Members report their share on personal returns
- Members pay self-employment tax on their share of profits
LLC Optional Tax Elections
Option 1: Elect C Corp tax treatment (Form 8832)
- Rarely beneficial for small businesses
- Creates double taxation issue
Option 2: Elect S Corp tax treatment (Form 2553)
- Potentially reduces self-employment taxes
- Adds payroll and compliance complexity
When S Corp Election Actually Makes Sense
Here’s my practical framework based on 15 years of experience:
The Magic Number: $70,000+ Net Income
Why this threshold matters: Below $70,000, the tax savings rarely justify the additional complexity and costs.
Above $70,000: The self-employment tax savings can be substantial enough to offset the additional administrative burden.
Real-World Example
LLC with $100,000 profit (default taxation):
- Self-employment tax: $15,300 (15.3% on full amount)
- Income tax: Based on your tax bracket
Same LLC electing S Corp taxation:
- Reasonable salary: $60,000
- Self-employment tax: $9,180 (15.3% only on salary)
- Tax savings: $6,120 annually
- Additional costs: $2,000-4,000 (payroll, accounting)
- Net benefit: $2,000-4,000 per year
Industries Where S Corp Election Often Makes Sense
- Consulting and professional services (high profit margins)
- Digital marketing agencies (low overhead, high profits)
- Software development (scalable income)
- Real estate services (commission-based income)
- Online businesses with significant profits
The Hidden Costs of S Corp Election
Most guides focus on the tax savings but ignore the real costs:
Required Ongoing Expenses
Payroll service: $1,200-$2,400 annually Bookkeeping: Additional $1,200-$3,600 annually
Tax preparation: Additional $500-$1,500 annually Total additional costs: $2,900-$7,500 per year
Administrative Requirements
Payroll taxes: Quarterly 941 forms, annual 940 forms
Reasonable salary: Must pay yourself a market-rate salary
Payroll frequency: Regular payroll (typically bi-weekly or monthly)
Record keeping: More complex bookkeeping requirements
Compliance Risks
Reasonable salary requirement: IRS scrutinizes salary levels
Payroll tax penalties: Late payments result in significant penalties
Form 1120S deadline: March 15th (earlier than other entity types)
My Recommendation Framework
After helping hundreds of business owners make this decision:
Stick with Default LLC Taxation If:
- Your net income is under $70,000 per member
- You’re in the first 2-3 years of business
- You have irregular income or cash flow
- You prefer simplicity over potential tax savings
- You don’t want to deal with payroll requirements
Consider S Corp Election If:
- Your net income consistently exceeds $70,000 per member
- You have stable, predictable income
- You’re comfortable with additional complexity
- You can afford the ongoing administrative costs
- You have or can hire competent accounting help
Definitely Get Professional Advice If:
- You’re considering this election
- Your income fluctuates significantly
- You have multiple business entities
- You’re unsure about reasonable salary levels
How to Check Your LLC’s Current Tax Status
Wondering how your LLC is currently taxed? Here’s how to find out:
Method 1: Call Your Accountant
If you have a tax professional, they should know immediately.
Method 2: Check Your Tax Returns
- Form 1040 Schedule C: LLC taxed as sole proprietorship
- Form 1065: LLC taxed as partnership
- Form 1120S: LLC taxed as S Corp
- Form 1120: LLC taxed as C Corp
Method 3: Call the IRS
Phone number: 1-800-829-4933 (business line)
What to ask: “What tax return is the IRS expecting for my LLC?”
Information needed: Your LLC’s EIN number
The Timing of S Corp Election
When to Make the Election
Deadline: Within 75 days of forming your LLC (for immediate effect)
Late election: Possible but requires special procedures and IRS approval
Annual election: Can elect for the following tax year until March 15th
Strategic Timing Considerations
New businesses: Usually wait until income justifies the complexity
Growing businesses: Monitor income levels and elect when beneficial
Seasonal businesses: Consider cash flow implications of regular payroll
Common S Corp Election Mistakes
Mistake #1: Making the Election Too Early
The problem: Electing S Corp status before your income justifies the complexity
Better approach: Wait until you consistently earn $70,000+ annually
Mistake #2: Underestimating Administrative Burden
The problem: Not budgeting for payroll services and additional accounting
Reality check: Plan for $3,000-7,500 in additional annual costs
Mistake #3: Setting Unreasonable Salary
The problem: Paying yourself too little to maximize tax savings
IRS scrutiny: They audit low salaries in relation to business profits
Safe approach: Pay market-rate salary for your role
Mistake #4: Ignoring Cash Flow Impact
The problem: Regular payroll requirements strain irregular cash flow
Consider: Whether you can commit to regular salary payments
State Tax Considerations
States That Don’t Recognize S Corp Election
Some states don’t recognize federal S Corp elections for LLCs:
- New York: Doesn’t recognize LLC S Corp elections
- Tennessee: Different rules for LLC S Corp taxation
- New Hampshire: Special considerations apply
Important: Consult with a tax professional familiar with your state’s rules.
States with No Income Tax
If you’re in a no-income-tax state (Texas, Florida, Nevada, etc.), the S Corp election only affects federal taxes, which may change the cost-benefit analysis.
Alternative Tax Strategies
Before jumping to S Corp election, consider these alternatives:
Maximize Business Deductions
- Home office deduction
- Business vehicle expenses
- Equipment and technology purchases
- Professional development and education
- Health insurance premiums (if eligible)
Retirement Plan Contributions
- SEP-IRA (up to 25% of income)
- Solo 401(k) (higher contribution limits)
- Simple IRA for businesses with employees
Income Smoothing Strategies
- Timing of income and expenses
- Equipment purchases for depreciation
- Retirement plan contributions
Making the Right Decision
Here’s my honest assessment after 15 years of helping business owners:
For most LLCs under $70,000 profit: Stick with default taxation. The simplicity is worth more than the modest tax savings.
For LLCs over $70,000 profit: The S Corp election is worth serious consideration, but only with proper professional guidance and realistic budgeting for additional costs.
For high-profit LLCs ($150,000+): S Corp election often makes clear financial sense, assuming you can handle the administrative requirements.
Universal rule: Never make this decision without consulting a qualified tax professional who understands your specific situation.
FAQ: Your LLC vs S Corp Questions
Can I change my mind after electing S Corp status?
Yes, but there are restrictions. You generally can’t elect S Corp status again for 5 years after terminating it.
Do I need a separate business bank account for S Corp taxation?
Yes, and it becomes even more critical because of payroll requirements and IRS scrutiny.
Can single-member LLCs elect S Corp taxation?
Yes, single-member LLCs can elect S Corp taxation, and it often makes more sense than for multi-member LLCs.
What happens if I forget to pay myself a salary?
The IRS can reclassify distributions as wages and assess payroll tax penalties. This is a common and expensive mistake.
Can I elect S Corp status retroactively?
Generally no, but there are limited relief procedures for late elections. Don’t count on these working.
Does S Corp election affect my LLC’s liability protection?
No, S Corp election is purely a tax matter. Your LLC’s liability protection remains unchanged.
The Bottom Line on LLC vs S Corp
Here’s my straightforward advice: An LLC is a business structure. S Corp is a tax election. They’re not mutually exclusive—they’re different tools for different purposes.
For most entrepreneurs: Form an LLC for liability protection and business credibility. Stick with default taxation until your income justifies the complexity of S Corp election.
For high earners: The S Corp election can provide meaningful tax savings, but only with proper planning, professional guidance, and realistic budgeting for additional costs.
Remember: Tax elections can usually be changed, but business structures are harder to modify. Get your foundation right first, then optimize your taxes as your business grows.
The most important decision is forming your LLC and protecting your personal assets. The tax optimization can come later when you have the income to justify the complexity.
Ready to form your LLC and make smart tax decisions? I’ve helped over 1,000 entrepreneurs choose the right business structure and tax strategy. Check out my complete LLC formation guide or learn about the best LLC formation services for 2025.
Questions about LLC formation or S Corp elections for your specific situation? Send me a message—I personally read and respond to every inquiry within 24 hours.