An LLC is a great place to start. It is a terrible place to stay.
I see this every week. Someone is doing 200K in profit, still filing as a single member LLC, and handing the government tens of thousands of dollars they never had to send. They are not doing anything wrong. Nobody told them there was another option.
The problem is self employment tax
As a default LLC, every dollar of profit is hit with self employment tax. That is 15.3 percent. Social Security and Medicare, both halves, because you are the employer and the employee.
That is before income tax. Income tax comes after, on top, at your regular bracket.
So on 200K of profit you are paying roughly 30K in self employment tax alone. Not income tax. Just the SE piece.
What an S-Corp changes
An S-Corp is not a different business. It is a tax election. Same LLC, same bank account, same clients. You just tell the IRS to tax it differently.
Once you elect S-Corp, your profit splits into two buckets.
Bucket one is your salary. You put yourself on actual payroll and pay yourself a reasonable wage. That salary gets hit with the 15.3 percent, same as before.
Bucket two is distributions. That is the rest of the profit, and it does not get touched by self employment tax at all.
That second bucket is the entire game.
Run the numbers
Take 200K in profit.
As an LLC, all 200K is exposed. 15.3 percent of 200K is about 30,600 in self employment tax.
Elect S-Corp. Pay yourself a reasonable salary of 80K. That 80K gets hit, so about 12,240. The remaining 120K comes out as distributions and gets hit with zero self employment tax.
Difference is roughly 18,000 back in your pocket. Same revenue. Same work. Same clients. One election.
At 300K of profit the gap gets wider. At 500K it is not close.
Reasonable is the word that matters
You cannot pay yourself 12K and call 188K distributions. The IRS uses the word reasonable and they mean it. Reasonable means what you would have to pay somebody else to do your job.
If you are the operator, the closer, the person the business runs on, your salary is not 12K. Get that number wrong on the low side and you invite a reclassification, back payroll taxes, and penalties.
Get it right and nobody blinks.
When it makes sense
The rough line is around 60K to 80K in net profit. Below that, the payroll costs, the extra return, and the admin eat most of the savings. Around 150K and up, this is not a close call.
There is real overhead. A separate 1120S return. Running actual payroll. A bookkeeping setup that is clean enough to support both. Budget for it. It is still a fraction of what you save.
Do not guess
The math is simple but the inputs are yours. Your profit, your role, your state.
Run the S-Corp calculator at /tools/s-corp-calculator. It takes two minutes and tells you what the election would actually save you at your numbers.
If the number is big, book a call and we will handle the election and the payroll setup.