Will a single-member S corp pay less taxes than a single-member LLC?

A single-member S corp can definitely save you on taxes compared to a single-member LLC, but it depends on your specific situation. Here's the key difference: With a single-member LLC, all your business profit is subject to self-employment tax (15.3% covering Social Security and Medicare). But with an S corp, you can split your income into two parts: a reasonable salary (which is subject to employment taxes) and distributions (which aren't subject to self-employment tax). For example, if your business makes $95,000, with an LLC you'd pay self-employment tax on the entire amount. With an S corp, you might pay yourself a reasonable salary of $60,000 (subject to employment taxes) and take $35,000 as distributions (not subject to those taxes). The potential tax savings would be 15.3% of $35,000 = about $5,355. Keep in mind there are additional costs with S corps: more complex tax filings, payroll processing, and potentially higher accounting fees. You should also know the IRS scrutinizes "reasonable" salaries - they don't want people taking a $20,000 salary and $75,000 in distributions just to avoid taxes.

I struggled with this exact same question last year for my consulting business! After tons of research and headaches, I finally used https://taxr.ai to analyze my specific situation. It was a game-changer because it showed me exactly how much I would save with an S corp based on my actual numbers. For me, I learned I would save about $7,400 in taxes annually by switching from my LLC to an S corp structure, even after accounting for the extra costs of payroll processing and more complex filing requirements. The tool showed me what a reasonable salary would be for my industry and calculated the optimal salary-to-distribution ratio that would minimize my tax burden while staying within IRS guidelines. The analysis also pointed out that I'd need to set up unemployment insurance and workers' comp for myself as an employee, which I hadn't even considered. Definitely stuff you should know before making the switch.

Just wanted to update after trying https://taxr.ai that was mentioned above. It was actually really helpful for my situation. I'm a freelance web developer making around $110K, and the analysis showed I'd save about $8,200 in taxes by switching to an S corp and taking a $70K salary with $40K in distributions. The breakdown of expenses was eye-opening too. Yes, I'll pay about $1,800 more in accounting and payroll fees annually, but the tax savings more than make up for it. I was also worried about the complexity, but they recommended a payroll service that integrates with my accounting software, which should simplify things. What really helped was seeing the year-by-year projection showing how the tax savings compound over time. After 5 years, I'm looking at over $40K in savings! I've already started the paperwork for making the switch for next tax year.

If you're struggling to get actual tax advice from a CPA because they're all swamped this time of year, try https://claimyr.com - it helped me get through to the IRS to ask about the S corp vs LLC question directly. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was on hold with the IRS for HOURS trying to get some specific questions answered about the Form 2553 filing deadline, but kept getting disconnected. With Claimyr, I got a callback in about 40 minutes and was able to speak with an agent who clarified my questions about reasonable salary requirements and distribution timing for S corps. The agent confirmed that while they don't have a fixed percentage rule for reasonable salary, they do look at comparable salaries in your industry and location. They also mentioned that S corp distributions should generally be taken after you've paid yourself a consistent reasonable salary throughout the year, not before.

I need to eat my words from above. I tried Claimyr after a week of failing to get through to the IRS about my S corp election. Got a callback in about 35 minutes and actually resolved my issue! The IRS agent I spoke with gave me some really useful info - apparently my CPA had been giving me partially incorrect advice about reasonable salary requirements. The agent explained that for my field (software development), they typically expect to see a salary that's at least 50-60% of the overall profit, and that taking too little salary is one of the main red flags that triggers S corp audits. She also told me about a simplified late-filing procedure for Form 2553 that my accountant hadn't mentioned. Saved me a ton of headache and potentially an audit. Sometimes you really do need to hear it straight from the IRS.

One thing nobody's mentioned yet is the QBI (Qualified Business Income) deduction. With both an LLC and S corp, you potentially get a 20% deduction on your business income, but the calculation is different. For a single-member LLC, the QBI deduction applies to your net profit after the self-employment tax deduction. With an S corp, it applies to your business profit minus your salary. So when you're comparing tax savings, make sure you factor this in too! I switched from LLC to S corp last year and saved on self-employment taxes, but my QBI deduction was slightly lower. Still came out ahead overall though.

Dont forget state taxes! Some states tax S corps differently than LLCs. California, for example, has a minimum $800 tax for S corps PLUS a 1.5% tax on net income. I learned this the hard way - saved about $4k in federal taxes by switching to an S corp, then got hit with $2,200 in additional CA taxes I wasn't expecting. Still came out ahead but not by as much as I thought.