Understanding Single-Member LLC Taxes
By default, a Single-Member LLC is treated as a disregarded entity. All net profits are subject to both income tax and a 15.3% Self-Employment Tax (Social Security and Medicare).
How S-Corporation Election Works
An S-Corp is an IRS tax status option for your LLC that lets you divide business earnings into two categories:
- W-2 Reasonable Salary: Subject to 15.3% payroll taxes.
- Shareholder Distributions: Exempt from the 15.3% self-employment tax.
Comparison Overview
| Feature | Single-Member LLC | S-Corporation Election |
|---|---|---|
| Self-Employment Tax | Paid on 100% of net profit | Paid only on reasonable salary |
| Payroll Setup | Not required | Required (W-2 processing) |
| Administrative Cost | Low | Higher (payroll & Form 1120-S) |
| Best Profit Threshold | Under $80,000 net income | $80,000+ net income |
When to Make the Switch
The tax savings from an S-Corp election typically start outweighing the extra accounting and payroll overhead costs once your business generates $80,000+ in annual net profit.
Since self-employment tax is one of the biggest factors in this comparison, it's also worth reading how it fits into how much you should set aside for quarterly estimated taxes.