S-Corp vs LLC: The $9,000 Decision You Might Be Getting Wrong

I’ve got two clients in the Galleria. Both run consulting practices. Both cleared $122,000 last year.

First client paid $18,600 in self-employment taxes. Second client paid $9,400.

Same income. Different choice on taxes.

The difference? First guy’s running a standard LLC. Second guy elected S-Corp treatment on his taxes.

This isn’t some shady shelter or aggressive move. It’s just picking the right tax bucket. The IRS gives you options, and most business owners pick the wrong one by default.

S-Corp Is Not What You Think

Here’s where people get confused: S-Corp isn’t a business structure you choose when you set up shop. It’s a tax election you make after.

You form an LLC. That’s the legal structure. Then you tell the IRS how you want that LLC taxed. Default is sole proprietorship. You can also pick S-Corp status. Or partnership. Or C-Corp if you’re feeling weird about it.

Your liability protection from the LLC stays solid no matter what. The tax bill changes. Everything else stays the same.

Standard LLC and That Self-Employment Tax Hit

Single-member LLC? The IRS says it doesn’t exist for tax purposes. All your profit flows to your personal return on Schedule C.

Here’s the kick in the teeth:

Every dollar of your net profit gets slapped with self-employment tax. That’s 15.3% on the first $176,100 (2025), then 2.9% above that.

When you work a job, you pay 7.65% and your employer pays 7.65%. You split it. When you’re your own boss, you’re writing both checks yourself. That 15.3% comes out of your pocket.

Real numbers: $120,000 in net profit as an LLC.

$120,000 times 15.3% equals $18,360 in self-employment tax alone.

That’s before income tax hits. That’s just the SE tax bill.

S-Corp Changes The Game

S-Corp election makes you a W-2 employee of your own company. You pay yourself a W-2 salary through payroll. Everything left over comes to you as a distribution.

Here’s the part that matters: only your salary gets hammered with payroll tax. The distribution walks free.

Real example: $120,000 profit as an S-Corp, salary set at $60,000.

Payroll taxes on that $60,000 salary: $9,180.

Payroll taxes on the $60,000 distribution: zero.

Total employment taxes: $9,180.

You just saved $9,180 compared to the standard LLC. That’s real dollars staying in your bank account.

What The IRS Means By “Reasonable Salary”

Can’t game this. You can’t pay yourself $5,000 and take the rest as a distribution to dodge taxes. The IRS requires a “reasonable salary” if you’re an S-Corp owner.

What counts as reasonable:

What other people make doing the same work. Your experience level. How much time you spend running things. How much money the business makes. The neighborhood matters too (Energy Corridor salaries differ from Montrose).

I had a guy in Cypress with $145,000 in profit trying to give himself a $35,000 salary. That gets flagged. You can’t be a full-time executive and take $35,000 in salary. IRS will challenge it fast.

Rough target: salary runs 40% to 60% of your net profit, depending on industry. Bump it higher if you’re the rainmaker bringing in the clients. Lower it if you’ve got employees doing heavy lifting and passive income flowing in.

The Price of Running S-Corp

S-Corp cuts your tax bill. S-Corp also costs money and creates work.

Payroll Is Real Now

You can’t just write yourself a check. Real payroll requirements:

Monthly paychecks. Federal withholding, Social Security, Medicare getting pulled out. Quarterly Form 941 filings. State unemployment taxes. W-2 by end of January.

Software to run payroll yourself runs $500 to $1,000 a year. Send it to a payroll company and you’re looking at $1,200 to $2,400 annually.

You File Two Returns

S-Corp means filing Form 1120-S with the IRS. That’s a separate business return on top of your 1040.

That extra return costs: $500 to $1,500 more in tax prep, minimum.

Full Year Compliance Tab

Add it up: $1,500 to $3,000 every year for S-Corp overhead.

When S-Corp Actually Pencils Out

Math is straightforward. SE tax savings have to beat what you spend on compliance.

Annual Net Profit	Estimated SE Tax Savings	Compliance Costs	Net Benefit
$40,000	around $3,000	around $2,500	around $500
$60,000	around $5,000	around $2,500	around $2,500
$80,000	around $6,500	around $2,500	around $4,000
$100,000	around $8,000	around $2,500	around $5,500
$150,000	around $11,000	around $2,500	around $8,500

The threshold: S-Corp usually works when you’re consistently hitting $50,000 to $60,000 in profit or higher. Below that, compliance costs eat the savings.

When S-Corp Makes Zero Sense

You’re Not Making Enough Yet

At $30,000 to $40,000 profit, you’re paying more in compliance costs than you save. Stay standard LLC until the money grows.

Your Income Jumps All Over

$150,000 one year, $30,000 the next. Managing reasonable salary becomes a nightmare. Not worth the headache.

You’re Selling The Business Soon

S-Corp taxation creates complications on exit. Tax surprises happen. If you’re selling within the next year or two, talk to me first.

Passive Income Business

You’re not actively running things. IRS gets skeptical about salary versus distribution splits when you’re hands-off.

You Like Keeping It Simple

Some owners would rather sleep at night than squeeze every tax dollar. Standard LLC is simpler. No argument.

How You Actually Make This Happen

Filing The Election

Form 2553 goes to the IRS.

Timing matters: file by March 15 of the tax year you want it effective. For brand new LLCs, you’ve got 75 days from formation. Late elections sometimes get accepted if you’ve got a decent reason.

Texas Specific

Texas doesn’t tax income. S-Corp election is purely federal here.

Texas franchise tax exists, but only kicks in over $2.47 million in revenue (2025). Most small businesses skip under that and pay nothing.

Making Your Decision

Pick S-Corp if:

You’re clearing $60,000 or more consistently. You’re working full-time in the business. Income is predictable year to year. Payroll administration doesn’t scare you. You’re keeping this business long-term.

Stay Standard LLC if:

You’re under $50,000. Income fluctuates. Simplicity matters more than optimization. Exit or sale is in your near future. Business is mostly passive.

Do The Math On Your Situation

Before you decide:

Calculate what you’re paying in SE tax right now on your actual profit.

Estimate your reasonable salary (40% to 60% of net profit).

Calculate SE tax on just that salary amount.

Subtract what S-Corp compliance costs per year.

See your actual net gain.

If the savings hit $2,000 or more, S-Corp probably makes sense. Under $1,000? The paperwork probably isn’t worth it.

Getting This Right Matters

This decision hits your taxes, your workload, and your exit plan. It’s not something to guess on.

I run the numbers for Houston business owners, handle the elections, manage payroll setup, and make sure your books are clean for the IRS. I’ve seen both the wins and the disasters with S-Corp decisions across hundreds of clients in Montrose, Galleria, Energy Corridor, everywhere.

Want to know if S-Corp actually works for your situation? Contact us and we’ll run your specific numbers.

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This article provides general information and is not tax advice. Tax situations vary, and you should consult with a qualified tax professional about your specific circumstances.