Foxel
llcs-corpentitytaxessmall-business

LLC vs S-Corp: The Real Tax Math for Owner-Operators Making $100k–$500k

Oct 30, 2026

You will not find this calculation on most firm websites because it tells people when NOT to elect S-corp. We will tell you honestly, because getting this wrong wastes thousands of dollars.

The actual mechanic

As a single-member LLC taxed as a sole proprietor, every dollar of profit is subject to self-employment tax at 15.3% (12.4% Social Security up to $168,600 and 2.9% Medicare, uncapped) in addition to income tax.

When you elect to be taxed as an S-corporation (by filing Form 2553), only the salary you pay yourself is subject to those payroll taxes. Any additional profit distributed to you as a shareholder distribution is NOT subject to SE tax.

So if you make $200k in net profit and pay yourself a $80k "reasonable" salary, you save SE tax on $120k. At 15.3% that is $18,360 saved per year. On paper.

Except S-corp status also costs you money.

The costs the article you Googled left out

Running payroll for yourself, filing a corporate return, maintaining a separate corporate structure costs real money:

  • Payroll processing: $600–$1,200/year via Gusto or QuickBooks Payroll
  • Form 1120S preparation: $599–$1,500/year for the business return (in addition to your personal 1040)
  • Separate accounting: 2–4 hours/month of extra bookkeeping effort or ~$600/year extra
  • State franchise taxes: varies by state. California charges $800/year minimum regardless of income. Illinois charges $75/year.
  • Reasonable compensation audit risk: paying yourself too little salary is the #1 S-corp audit trigger. Reasonable comp is a defensible number backed by comparable salaries in your industry and role.
  • Lost QBI deduction partial on the salary portion for high earners above the phase-out thresholds.

Round numbers: $2,000–$3,500/year in additional cost to be an S-corp.

The break-even point

Rule of thumb: S-corp election pays off when your net business profit (after reasonable salary) is at least $30,000–$40,000 per year. Below that, the costs eat the savings.

Here is the math for a few profit levels, assuming a reasonable salary of 50% of profit and $3,000/year in S-corp overhead:

| Net profit | Reasonable salary | Distribution | SE tax saved | S-corp cost | Net gain | |---|---|---|---|---|---| | $75,000 | $37,500 | $37,500 | $5,738 | $3,000 | $2,738 | | $100,000 | $50,000 | $50,000 | $7,650 | $3,000 | $4,650 | | $150,000 | $75,000 | $75,000 | $11,475 | $3,000 | $8,475 | | $200,000 | $80,000 (capped) | $120,000 | $18,360 | $3,000 | $15,360 | | $300,000 | $100,000 | $200,000 | $30,600 | $3,000 | $27,600 | | $500,000 | $140,000 | $360,000 | $55,080 | $3,000 | $52,080 |

Note the SE tax savings grow linearly after you cross the Social Security wage base ($168,600 for 2026) because the 12.4% component maxes out — only the 2.9% Medicare continues to apply.

When NOT to elect S-corp

  • You net less than $40k/year. The overhead eats the savings.
  • You have highly variable income (e.g., a seasonal business) and cannot sustainably pay yourself a steady salary.
  • You already have a W-2 job maxing out your Social Security wage base. The payroll-tax savings component is gone.
  • You are in year one of a business that may fold. Dissolving an S-corp is harder than dissolving a sole prop.
  • You have foreign ownership. S-corps have strict US-person-only ownership rules.
  • You take on investors. S-corps have one-class-of-stock and 100-shareholder limits that make this painful fast.

When to definitely elect S-corp

  • You consistently net $75k+ and expect it to continue.
  • You already run payroll for employees — you are paying for payroll overhead anyway.
  • You are in a service business where your work is clearly separable from distributions.
  • You can defensibly justify a "reasonable salary" in writing.

The timing

Form 2553 must be filed by March 15 to take effect for the current calendar year. For 2026 that is March 15, 2026. Late elections are possible via Rev. Proc. 2013-30 but you need a reasonable cause explanation.

If you already run an LLC and want to be taxed as an S-corp, the LLC continues to exist as a legal entity — only the tax classification changes.

What a Foxel S-corp engagement looks like

If you decide this makes sense for you:

  1. We file Form 2553 (included in LLC formation on Growth and Scale plans).
  2. We set up Gusto or QuickBooks Payroll for a monthly or bi-weekly pay cycle.
  3. We benchmark your reasonable comp against public comp data for your role and industry.
  4. We handle quarterly 941s, annual 940 and W-2 for you.
  5. At year end, we prepare the 1120S and the K-1 for your personal return.

Get S-corp advice.

The right call depends on your specific income, state, and plans. The wrong call costs real money. Model the actual numbers before you file.