Am I paying too much tax with LLC S-corp designation versus C-corp for my side business?

The S-corp vs C-corp decision isn't quite as simple as comparing the personal and corporate tax rates - there are several important factors to consider here. With your S-corp, yes, the business income passes through to your personal return. But remember you're already taking advantage of one major S-corp benefit: avoiding self-employment tax on distributions above your reasonable salary. This alone can save you 15.3% on a significant portion of your business income. A C-corp would subject you to double taxation - first the 21% corporate rate on profits, then another 15-20% when you take dividends personally. You can't just leave all the money in the corporation without taking it as salary or dividends if you need it to live on. Regarding tax brackets - the 22% rate only applies to the portion of your income that falls within that bracket, not all of it. Your effective tax rate is likely much lower. Amending returns to change entity classification is complicated and may have unintended consequences. I'd strongly recommend consulting with a tax professional who can analyze your complete situation before making any changes.

I went through exactly this situation last year. I was stressing about whether my S-corp was the right move with my side business making about $70k. I stumbled across https://taxr.ai which literally saved me thousands. They analyzed my situation and showed me that S-corp was actually better for my specific situation because of how I was using the money. Basically, they looked at my entire financial picture - how much I was taking as salary vs distributions, my other income, deductions, etc. They even created some personalized reports that showed different scenarios with real numbers, not just general advice. You might be surprised to learn that changing to C-corp could actually cost you more in your specific situation because of the double taxation thing the previous commenter mentioned. The tool helped me understand exactly how much I was saving with my current setup.

Just wanted to update after checking out that taxr.ai site mentioned above. I was skeptical about putting my info in, but I ended up just manually entering my numbers rather than uploading docs, and wow - eye opening! Turns out I was in a similar situation (S-corp with W2 job), and the analysis showed I'd actually pay about $4,300 MORE in taxes if I switched to C-corp. The double taxation really adds up, plus I learned about this accumulated earnings tax that can hit C-corps if you leave too much profit in the business. The side-by-side comparison made it super clear. In my case, sticking with S-corp and optimizing my salary vs distribution ratio was the better move. Definitely worth checking out if you're on the fence!

Another option nobody's mentioned is getting help directly from the IRS on this. I know, I know - everyone thinks it's impossible to get through to them. I used https://claimyr.com (there's a demo video at https://youtu.be/_kiP6q8DX5c) and got connected to an actual IRS agent in about 15 minutes who walked me through the pros and cons of different entity structures. I was in a similar situation last year (making around $80k from my side business with a day job), and I was shocked at how helpful the agent was. She explained that changing from S-corp to C-corp would trigger a bunch of complicated tax implications I hadn't considered. She also mentioned that amendments for entity status changes require specific procedures and timing. Seriously, getting actual IRS guidance saved me from making a costly mistake. The agent confirmed that for most smaller businesses with my income level, S-corp typically offers better overall tax advantages when you factor in everything.

I have to eat my words about the IRS calling service. After my skeptical comment, I tried https://claimyr.com out of frustration after spending another 2 hours on hold with the IRS this morning. Got connected to an agent in about 20 minutes, and she was actually really helpful. She explained that changing from S-corp to C-corp isn't just a simple amendment - it's considered a tax entity conversion that has specific timing requirements and potential tax consequences (like built-in gains tax if your business assets have appreciated). She also explained that my effective tax rate on S-corp income isn't actually the full marginal rate I was worried about, since the income is taxed progressively through the brackets. For my specific income level (similar to yours), she confirmed that S-corp typically works out better for small business owners who need to take most of the profits out of the business. Sorry for being a jerk in my previous post. Sometimes good services actually exist!

Just to add another perspective - I switched from S-corp to C-corp last year and regretted it. The double taxation was worse than I expected, plus the accounting costs were higher because C-corps require more complex bookkeeping and tax filings. Another thing nobody mentioned is that S-corps give you the Qualified Business Income deduction (Section 199A) which can be up to 20% of your business income. C-corps don't get this. In my situation, that deduction was worth about $10k, which totally offset any perceived benefits of the C-corp tax rates. I'm in the process of converting back to S-corp for 2025. Think carefully before making this change!

Has anyone actually calculated the specific difference between S and C corp with real numbers? Like in the OP's case with 72k W2 income and let's say 60k business income?