LLC vs S Corp for Single-Member Businesses: 2026 Guide

Quick Answer

Single-member LLCs with profits over $60,000 typically benefit from S Corp election. The 15.3% self-employment tax savings on distributions above reasonable salary outweigh compliance costs. Below $60K, default LLC taxation is usually simpler.

Key Takeaways

  • Default Taxation: Single-member LLCs taxed as sole proprietorships
  • S Corp Benefit: Eliminates self-employment tax on distributions
  • Salary Required: Must pay yourself reasonable W-2 wages
  • Compliance Cost: Additional $500-1,000/year for payroll
  • Best Threshold: Profits consistently over $60,000

Single-Member LLC Default Taxation

By default, single-member LLCs are “disregarded entities.” All income/expenses reported on Schedule C of your personal return.

Pros:

  • Simplest tax filing (Schedule C)
  • No separate business return
  • No payroll required
  • Maximum flexibility

Cons:

  • 15.3% self-employment tax on ALL profit
  • Higher audit risk for Schedule C
  • No separation between salary and profit

S Corp Election for Single-Member LLCs

Electing S Corp status changes taxation significantly.

How It Works:

  1. Pay yourself W-2 salary (subject to payroll taxes)
  2. Remaining profit distributed as dividends (no payroll tax)
  3. File Form 1120-S (separate business return)

Example: $100,000 profit, $50,000 salary

LLC Default:

  • Self-employment tax: $15,300
  • Income tax: ~$12,000
  • Total: ~$27,300

S Corp:

  • Payroll tax on salary: $7,650
  • Income tax on salary: ~$4,500
  • Income tax on $50,000 distribution: ~$6,000
  • Total: ~$18,150
  • Savings: ~$9,150

FAQ

1. Can a single-member LLC be an S Corp?

Yes! Form LLC, then elect S Corp status with IRS Form 2553. You remain a single-member LLC but with S Corp taxation.

2. What’s a reasonable salary for one-person S Corp?

Market rate for your job. Research similar positions on Glassdoor, BLS data. Typically 40-60% of profits.

3. Do I need payroll if it’s just me?

Yes, S Corp status requires W-2 wages. You can use affordable payroll services ($40-80/month).

4. Can I take distributions anytime?

Yes, as long as you have sufficient basis (investment in the business) and have paid reasonable salary first.

5. What’s the minimum profit for S Corp to make sense?

Generally $60,000+. Below that, self-employment tax savings don’t justify compliance costs.

6. Is Schedule C audit risk real?

Yes. Schedule C filers have higher audit rates than S Corp returns. S Corp structure may reduce audit risk.

7. Can I switch back to LLC default taxation?

Yes, by revoking S election. Must wait 5 years to re-elect without IRS consent.

8. Do I need a separate bank account?

Yes, required for both LLC and S Corp. Commingling funds pierces liability protection.

9. What about retirement contributions?

S Corps can set up 401(k) with higher contribution limits than SEP-IRA available to sole proprietors.

10. Should I hire a professional?

Recommended. Tax savings typically far exceed CPA costs ($1,000-2,500/year for S Corp returns).

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