LLC vs S-Corp Tax Savings Estimator

The 15.3% Self-Employment Tax Trap

If you operate as a Sole Proprietor or a standard Single-Member LLC, the IRS taxes 100% of your net business profit with a 15.3% Self-Employment (SE) tax. This tax covers your Medicare and Social Security contributions.

This 15.3% is charged in addition to your standard federal and state income taxes. For highly profitable freelancers, this tax burden can become crushing.

The S-Corp Loophole

By filing Form 2553, you can ask the IRS to tax your LLC as an "S-Corporation."

In an S-Corp, you divide your profit into two buckets:

1. A W-2 Salary: You must pay yourself a "reasonable salary." This salary is subject to the 15.3% FICA/SE tax.
2. Owner Distributions: The rest of your profit is taken as a distribution. Distributions are NOT subject to the 15.3% SE tax.

For example, if your business profits $100k, and you take a $50k salary, you only pay the 15.3% tax on the $50k salary. The remaining $50k is distributed to you free of SE tax, saving you approximately $7,650!

When is an S-Corp NOT worth it?

Running an S-Corp requires extra administrative work. You cannot just transfer money to your personal account anymore. You must use a payroll provider (like Gusto or QuickBooks) to remit payroll taxes on your salary. You also have to file a separate corporate tax return (Form 1120-S), which means your CPA will charge you more.

Generally, if the "Net Tax Savings" does not outweigh the combined cost of payroll software (~$1,000/yr) and extra CPA fees (~$1,500/yr), you should remain a standard LLC.