Because for small business owners, self-employment tax is a killer. If you’re a solo LLC owner, all your business profit usually flows straight onto your personal tax return as “self-employment income” — hit with income tax and about 15% self-employment tax (Social Security + Medicare).

When you elect S Corp status, you split your profit two ways:
Part 1: You pay yourself a reasonable salary (subject to payroll taxes, just like a W-2).
Part 2: The rest shows up as a shareholder distribution — not hit by self-employment tax.

This “split” is the big advantage: it can legally reduce how much of your profit gets whacked by Social Security & Medicare taxes.

A single-member LLC is “disregarded” for tax purposes — super simple.

• You just report your income and expenses on Schedule C of your 1040.

• No separate corporate tax return.

• No payroll headaches if it’s just you.

• No special rules about shareholder meetings or officer payroll.

An S Corp is a tax election, not a separate entity type. But when you elect it, you:

• Must file an S Corp tax return (Form 1120S).

• Have to run payroll for yourself if you take a wage.

• Need clean books so you can prove salary vs. distribution.

• Have more IRS eyes on “reasonable salary” compliance.

It’s not rocket science — but it is more paperwork.

LLC (no S Corp):
All your profit — every dollar after expenses — is taxed as self-employment income. So you pay both income tax and self-employment tax on the whole pot.

S Corp:
Part of your profit is paid out to you as wages (subject to payroll taxes). The rest is a distribution, taxed for income tax but not for self-employment tax.

Same income tax either way — the savings is in reducing that 15% SE tax on the non-salary piece.

Nope — that’s the catch.

• If your net profit is too low (under ~$40K–$50K), the extra cost of payroll, separate tax filing, and admin wipes out the savings.

• If you don’t run a reasonable salary, you can get audited and lose the tax break.

• If you have losses, an S Corp doesn’t help — the whole benefit is splitting profit.

It’s great for profitable businesses with consistent earnings — terrible for tiny or break-even operations.

The IRS says if you own an S Corp and do the work, you must pay yourself a fair wage before taking any leftover profit as a distribution. Too many owners skip this, hoping to dodge payroll taxes entirely — that’s audit bait.

What’s reasonable? It depends on your role, industry, profit level, and how much you’d have to pay someone else to do your work. As a rule of thumb, most S Corp owners pay themselves 30–50% of net profit as wages — but that’s just a rough guide.

It’s one reason you need good books and good advice.

Yes — this is super common.

• You start as a single-member LLC (or multi-member LLC).

• When your profit is big enough to benefit, you file Form 2553 to elect S Corp status.

• This doesn’t change your LLC with the state — it just changes how the IRS taxes you.

There’s even a fix for late elections (backdating it if you qualify). I handle these all the time — no big deal if you missed the window.

Screw up your S Corp election and you risk:

• Paying too little salary → IRS penalty and back taxes.

• Missing payroll tax filings → interest & penalties.

• Forgetting to file the annual S Corp return → late fees, possible loss of election.

• Running personal expenses through the business → big audit target.

It’s all fixable — but better to get it right up front than fight the IRS later.

Usually not. If you’re just testing an idea, making a few grand on the side, or gigging part-time — an S Corp rarely pays off. The admin cost and extra compliance kill the savings.

Once your side gig clears ~$40K–$50K in profit (after expenses), then it’s worth a serious look. Until then? Stay simple — keep it an LLC, file on Schedule C, reinvest in your growth, and avoid unnecessary costs.