Choosing the right structure for your business often feels like a math problem where the stakes are your hard-earned profits. Most people start as an LLC because it is simple and offers protection.

As your income grows, you might hear that an S-Corp election is the "secret" to paying less in taxes.

For 2026, the rules around these structures remain a top priority for small business owners. Understanding the financial impact of each choice can save you thousands of dollars every year.

Here is how to tell which one puts more money in your pocket.

The Default: How an LLC Gets Taxed

A standard LLC is a "pass-through" entity. This means the business itself does not pay federal income tax. Instead, the profits flow directly to your personal tax return.

While this sounds simple, it comes with a significant cost: Self-Employment Tax.

When you operate as a standard LLC, the IRS views all your business profit as earned income. You must pay the full 15.3% self-employment tax on every dollar you make. This covers both the employer and employee portions of Social Security and Medicare.

If your business nets $100,000, you pay that 15.3% on the whole amount before you even get to your regular income tax brackets.

The Strategy: How an S-Corp Saves Money

An S-Corp is not a different type of legal entity; it is a tax status you can apply to your LLC. The primary advantage of this status is the ability to split your income into two buckets.

  1. Reasonable Salary: You pay yourself a W-2 wage for the work you do. This portion is subject to Social Security and Medicare taxes.
  2. Distributions: The remaining profit can be taken as a dividend-like distribution. This portion is not subject to self-employment tax.

By moving a portion of your income into the distribution bucket, you effectively "shield" that money from the 15.3% tax.

Putting the Math to the Test

Let’s look at a business earning $120,000 in net profit.

  • Standard LLC: You pay 15.3% on $120,000. Your self-employment tax bill is roughly $18,360.
  • S-Corp Election: You pay yourself a "reasonable salary" of $70,000. You pay the 15.3% tax only on that $70,000 ($10,710). The remaining $50,000 is taken as a distribution with $0 in self-employment tax.

In this scenario, the S-Corp saves you $7,650 in a single year.

The "Catch" and the $60,000 Rule

Savings aren't free. Running an S-Corp involves more paperwork and higher administrative costs. You have to run payroll, file a separate corporate tax return (Form 1120-S), and issue yourself a W-2.

Most accountants suggest that if your business nets less than $60,000, the costs of payroll and accounting might eat up your tax savings.

Once you pass that $60,000 to $80,000 profit mark, the tax savings usually far outweigh the extra effort.

You cannot simply pay yourself $1 in salary and take the rest as tax-free distributions. The IRS watches this closely.

Your salary must be "reasonable" for the work you perform. If a manager in your industry makes $70,000, your salary should reflect that. If you set it too low, you risk an audit and back taxes.

Final Thoughts

If you are just starting and your profits are unpredictable, a standard LLC is the easiest path. It provides the legal protection you need without the administrative burden.

If your business is established and consistently clearing over $60,000 in profit, it is time to look at the S-Corp election.

Switching at the right time is one of the most effective ways to lower your tax bill and keep more of what you earn.