“Should I become an S corp?” is the most common question freelancers ask once they start earning well. The answer turns on one thing — self-employment tax — and on whether the savings beat the extra costs.
LLC and S corp are different kinds of things
An LLC is a legal structure created under state law. It separates your business from you personally for liability purposes. For federal tax, a one-owner LLC is ignored by default and taxed exactly like a sole proprietor: profit goes on Schedule C and all of it is subject to self-employment tax.
An S corporation is a tax election. An LLC (or a corporation) can elect S corp status by filing Form 2553. You can be an LLC taxed as an S corp.
Where the savings come from
As an S corp owner who works in the business, you must pay yourself a reasonable salary through payroll. That salary is subject to Social Security and Medicare tax, just like an employee’s. Profit above the salary can be taken as distributions, which are not subject to those payroll taxes.
As a sole proprietor or default LLC: self-employment tax ≈ $16,955.
As an S corp paying a $70,000 salary: payroll taxes on the salary (both halves) ≈ $10,710; the other $50,000 is a distribution.
Difference ≈ $6,245 a year — before the extra costs below and other tax effects.
Check the sole-proprietor side with the self-employment tax calculator.
What it costs
- Payroll. You run payroll for yourself, with withholding and quarterly payroll filings — usually through a payroll service.
- A separate tax return. The S corp files Form 1120-S and issues you a Schedule K-1, which usually means higher accounting fees.
- State costs. Some states charge annual franchise taxes or fees, or don’t fully recognize S corp status.
- Smaller retirement base. Retirement contributions are based on your salary, not total profit.
- Possible effects on other deductions, such as the qualified business income deduction.
“Reasonable salary” is not optional
The IRS expects owner-employees to pay themselves what they would pay someone else to do the same work. Paying a token salary to avoid payroll tax is a common audit issue. The savings come only from the profit genuinely above a fair wage.
When does it make sense?
There is no single breakeven number because costs and fair salaries vary. Many advisers start the conversation once profit is consistently above roughly $60,000–$80,000 a year and is expected to stay there. Below that, the savings are often eaten by payroll and accounting costs. Run your own numbers — or better, have an accountant run them — before filing Form 2553.
Bottom line
- Form an LLC for legal separation; it does not change your taxes by itself.
- Consider the S corp election when profit is high and steady.
- Get professional advice before you switch — it changes how you file for every year after.