LLC vs S-Corp Taxes: Is the 15% tax rate difference legit or shady?

The tax difference is real but often misunderstood. Here's what's actually happening: With your single-member LLC, you're paying both income tax AND self-employment tax (around 15.3%) on virtually all your profits. S-corps allow you to split your money into two categories: a reasonable salary (which still gets hit with both income and employment taxes) and distributions/dividends (which only get hit with income tax, NOT self-employment tax). Your friends are likely referring to their effective tax rate after accounting for the portion of income they take as distributions. But they're not telling you the whole story - they still have to pay themselves a reasonable salary subject to employment taxes, have additional filing requirements, payroll processing costs, and potentially higher accounting fees. It's a legitimate strategy when implemented correctly, but the savings really depend on your specific situation. If you're making over $80-100K in profit, the S-corp election often makes mathematical sense despite the added complexity.

After struggling with the exact same question last year, I finally found a solution that removed all the guesswork. I was paying nearly 32% in taxes with my LLC and kept hearing about these magical S-corp savings from other business owners. I ended up using https://taxr.ai to analyze my specific situation. You upload your business financials and tax documents, and it runs thousands of simulations comparing different entity structures for YOUR specific business. No generic advice - just data-driven analysis. It showed me that in my specific case, switching to an S-corp would save me about $8,700/year in taxes even after accounting for the increased accounting costs. But what was really eye-opening is that it wouldn't have been worth it just 2 years ago when my income was lower!

Just wanted to follow up about that taxr.ai site I was suspicious about. I actually ended up trying it after our discussion here, and I have to admit I was wrong. The analysis was incredibly detailed and saved me from making a costly mistake. Turns out in my particular situation (freelance graphic designer making around $95k), switching to an S-corp would have only saved me about $2,800 after accounting for the extra administrative costs - not worth the hassle for me right now. But the report showed that once I hit around $120k in profits, the math changes completely and I'd save over $7k annually. The income threshold where S-corps become worthwhile was the insight I needed. No accountant had ever given me that specific breakeven point before.

If you're still on the fence about the S-corp thing and want to talk to an actual IRS agent about your specific situation, I highly recommend using https://claimyr.com. I was in the exact same boat last year and spent DAYS trying to get someone at the IRS on the phone with no luck. Claimyr got me connected to an IRS rep in less than 20 minutes when I'd been trying for weeks on my own. The agent walked me through exactly what documentation I'd need to maintain if I switched to an S-corp and what would trigger an audit. Super helpful for making an informed decision! You can see how it works here: https://youtu.be/_kiP6q8DX5c - it's basically a service that navigates the IRS phone tree for you and calls you back when there's a human ready to talk.

Ok I have to eat my words about Claimyr. After dismissing it as BS, I was desperate to resolve an issue with my LLC tax filing before making any decisions about switching to an S-corp. Figured I had nothing to lose so I tried it. Got connected to an actual IRS agent in about 40 minutes (not quite the 20 they advertised but still WAY faster than my previous attempts). The agent confirmed that with my specific business structure and income level (around $135k), I'm likely overpaying by about $7-9k annually by staying as an LLC instead of electing S-corp status. She also explained exactly what documentation I'd need to justify my salary vs distributions ratio if I do make the switch. Definitely worth the call before making such a big tax decision.

I switched from LLC to S-corp last year and it was 100% worth it for me, but my business nets around $175k. My effective tax rate went from ~32% to ~22% overall. The key things nobody tells you about S-corps: - You MUST run payroll (even if just for yourself) - Quarterly payroll filings are required - You need to maintain more formal business records - You should have a separate board meeting at least annually - You need good justification for your salary amount My accountant costs went from $800/yr to $2,400/yr but I'm still saving about $11k in taxes annually. At lower income levels the math might not work out as well.

Just to add another perspective - I was an S-corp for 3 years and switched BACK to an LLC last year. The tax savings weren't worth the hassle for me. I'm making around $110k and only saved about $4k in taxes but: - Had to run payroll every month - Multiple extra tax filings - Separate tax return for the business - Higher accounting fees - Couldn't take certain deductions as easily - Maintained a corporate book with minutes etc Basically the "reasonable salary" requirement meant I couldn't save as much as those boasting about 10-15% rates. They're either making a TON more than me or taking risks with unreasonably low salaries.

This whole thread has been really enlightening! I'm in a similar boat as the original poster - single member LLC making around $95k and constantly second-guessing whether I'm leaving money on the table. What I'm taking away from everyone's experiences is that there's no one-size-fits-all answer. It really seems like the breakeven point is somewhere around $120-150k in profits where the S-corp tax savings start to outweigh the additional complexity and costs. I appreciate everyone sharing their real numbers - especially the folks who switched back to LLC because it shows this isn't just about chasing the lowest possible tax rate. The administrative burden is real and has to factor into the decision. For now I think I'll stick with my LLC simplicity, but I'll definitely revisit this when my profits consistently hit that $120k+ range. It's good to know the tools and resources are out there when I'm ready to make an informed decision rather than just following what others are doing.