LLC vs S-Corp Tax Basics

Default LLC taxation

A single-member LLC files on Schedule C. A multi-member LLC files Form 1065. All net profit is subject to 15.3% self-employment tax on top of income tax.

What changes with the S-Corp election

• Owner-employees take a reasonable W-2 salary
• Remaining profit flows through as a distribution
• Distributions avoid the 15.3% SE tax
• Owner must run payroll, file 941s, W-2, and 1120-S

When the math works

Most CPAs see the S-Corp begin to pay for itself around $50K–$80K of consistent net profit, once payroll, separate tax return, and admin costs are factored in.

Bookkeeping changes you must make

• Separate owner payroll from distributions in the books
• Track an accurate basis and shareholder equity
• Reimburse owner expenses via an accountable plan