If you’re a business owner or freelancer wondering how to legally lower your tax bill in 2025, understanding the differences between an LLC vs. S Corp is essential. Both are popular business structures among entrepreneurs in the U.S., but they come with very different tax implications.
This guide breaks down how each entity type affects your taxes, what income thresholds matter, and which structure might save you more money in the long run.
LLC vs. S Corp: Side-by-Side Comparison
| Feature | LLC (Default) | S Corporation |
|---|---|---|
| Formation | Simple, through state registration | Must elect S Corp with IRS |
| Taxation | Pass-through (self-employment tax) | Pass-through + potential salary split |
| Self-Employment Tax | Full profit subject to SE tax | Only salary portion pays SE tax |
| Owner Salary Required | No | Yes (must be “reasonable”) |
| Payroll Setup | Not required | Required |
| Extra Compliance | Minimal | Moderate (payroll, IRS filings) |
| IRS Form | Schedule C (1040) | Form 1120-S, K-1 |
| Best For | Sole proprietors, side hustlers | High-profit businesses ($50K+) |
What Is an LLC?
A Limited Liability Company (LLC) is the most flexible business entity structure. By default, it’s treated as a disregarded entity (sole proprietorship) or partnership (if multiple owners). All profits “pass through” to the owner’s personal tax return.
Tax Implications for LLCs:
- Pays 15.3% self-employment tax on entire net income (Social Security + Medicare)
- Income reported on Schedule C of Form 1040
- No payroll setup needed
Example:
If your LLC earns $80,000 in net income in 2025, you’ll pay approximately $12,240 in self-employment tax, plus federal and state income tax.
What Is an S Corporation?
An S Corp is not a business structure but a thttps://harplight.com/best-roth-ira-accounts-for-2025-low-fees-high-returns/ax election made with the IRS. Your LLC or C Corp must elect S Corp status via Form 2553 to access tax benefits.
The biggest advantage? Avoiding self-employment tax on distributions (the profit beyond your salary).
Tax Implications for S Corps:
- Must pay owner a reasonable salary subject to FICA (payroll) taxes
- Remaining profit is a distribution, not subject to SE tax
- Must file Form 1120-S and issue a Schedule K-1
Example:
Your S Corp earns $100,000. You pay yourself a $50,000 salary (subject to payroll tax), and take the rest as distribution (no SE tax).
Total SE tax paid = ~$7,650 instead of $15,300 with LLC.
Tax Savings: Real Example (2025 Projection)
| Scenario | LLC (Sole Prop) | S Corp (Salary + Distribution) |
|---|---|---|
| Net Profit | $100,000 | $100,000 |
| Owner Salary | — | $50,000 |
| Subject to SE Tax | $100,000 | $50,000 |
| SE Tax (15.3%) | $15,300 | $7,650 |
| Estimated Tax Savings | — | $7,650/year |
When Should You Switch to an S Corp?
Generally, an S Corp makes financial sense if:
- You’re earning over $50,000 in profit
- You’re ready to set up payroll services
- You want to optimize tax efficiency
However, if your profit is under $40,000 or inconsistent, the savings may not justify the added complexity and costs (accounting, payroll, IRS forms).
Additional Considerations for 2025
- State Taxes: Some states impose additional taxes or fees on S Corps (e.g., California’s $800 franchise tax)
- Audit Risk: S Corps face more IRS scrutiny; pay a reasonable salary to avoid penalties
- Payroll Costs: Plan ~$500–$1,000 annually for payroll services
Key Pros and Cons
LLC Pros:
- Easy to form and manage
- No payroll setup
- Best for solo or part-time businesses
LLC Cons:
- Entire income taxed as self-employment
- Less tax efficiency at higher profits
S Corp Pros:
- Big savings on self-employment tax
- Attractive to full-time freelancers and consultants
S Corp Cons:
- Complex filings
- Salary requirement and payroll costs
Final Verdict: LLC vs. S Corp in 2025
If your business is growing past $50,000–$70,000 in annual profits, electing S Corp status could save you thousands in self-employment taxes—especially in 2025, with rates expected to hold or rise.
Start with an LLC, then file Form 2553 to elect S Corp treatment once your revenue justifies it. It’s the most flexible and strategic path for most U.S.-based small businesses.
At Harplight, we help business owners navigate entity selection, tax optimization, and long-term wealth strategies.
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