Category: Single-Member LLC

QUESTION:

What’s the difference between a single-member LLC and an S-Corp?

ANSWER:

A single-member LLC is taxed as a sole proprietorship by default: all profits are subject to 15.3% self-employment tax. An S-Corp, however, allows the owner to pay themselves a reasonable salary (subject to payroll taxes) while taking the remaining profits as tax-free distributions. This split can save thousands in taxes once profits exceed about $50–60k annually.

The trade-off? S-Corps require formal payroll, annual filings, and stricter IRS rules, making them a better option for higher-earning businesses seeking tax efficiency.

Ellen, a solo entrepreneur, projects a net profit of $100,000 in her first year. The big question: keep her single-member LLC as a default sole proprietorship or elect S-Corp taxation?

As a sole proprietorship, she pays 15.3% self-employment tax on nearly the entire $100,000 plus income tax after the 20% qualified business income (QBI) deduction, for a total federal tax bill of about $21,630.

By electing S-Corp status and paying herself a reasonable $50,000 salary, only the salary is subject to payroll taxes ($7,650 total FICA). The remaining $50,000 flows as a tax-free distribution. After the same QBI deduction and slightly higher income tax, her total federal taxes drop to about $15,850.

Bottom line: the S-Corp route saves her roughly $5,800 in year one, even after minor payroll service costs.

For profits over roughly $60,000, S-Corp almost always wins for active owneroperators. At $100,000, the choice is clear — electing S-Corp puts thousands more in Ellen’s pocket from day one.

_{Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.}