S-corp versus LLC, and the revenue line where the election pays back

The S-corp election gets treated like a rite of passage. Hit some revenue number, flip the switch, save on self-employment tax. In practice the breakeven sits closer to $80,000 to $120,000 of net earnings from self-employment for most service businesses, and the answer moves depending on state tax, reasonable compensation, and the owner's other wage income.

The short version of the math. In an LLC taxed as a sole proprietor or partnership, 100% of net earnings are subject to self-employment tax at 15.3% up to the Social Security wage base ($168,600 for 2024, indexed). In an S-corp, only the W-2 wage the owner pays themselves is subject to payroll taxes. The distributions above that wage escape the 15.3%.

The saving is not free. It costs you:

• Additional payroll filings, typically $800 to $1,500 a year in compliance.
• A reasonable-compensation analysis that must hold up to IRS scrutiny. The "pay yourself $10,000 and take the rest as distribution" move is a known audit trigger.
• The S-corp basis tracking required for loss deduction, which most single-member LLCs have never had to think about.
• State-level quirks. California imposes a 1.5% franchise tax on S-corp net income with a $800 minimum. That is a real line of cost that the federal analysis misses.

A usable rule of thumb: if your net earnings from self-employment after a defensible owner salary are under $40,000, the S-corp almost never pays back. Between $40,000 and $80,000, it is a close call and the answer usually turns on state tax. Above $100,000 the savings are large enough that the compliance cost disappears into the margin, and the remaining question is only whether you can defend the wage level you choose.

The question that changes the math the most: does the owner have other W-2 income that already fills the Social Security wage base? If yes, the S-corp savings shrink because the SS portion of SE tax was going to cap out anyway. You are left with the 2.9% Medicare piece plus the 0.9% additional Medicare at higher incomes, which is a much thinner saving.

One move that is often missed: an LLC can elect to be taxed as an S-corp without re-forming the entity. You file Form 2553. The underlying LLC stays, the K-1 changes shape. That is usually the right path for an existing single-member LLC considering the switch.