An LLC and an S-Corp are not the same kind of thing, which is the root of most confusion. An LLC is a legal business structure. An S-corp is a tax election that an LLC (or corporation) can choose. For many independent consultants, electing S-corp status once net profit consistently exceeds roughly $80,000 can reduce self-employment tax, but it adds payroll, paperwork, and costs.
Here is the decision in plain English, including the income level where it usually starts to pay off.
LLCs and S-Corps are answering two different questions
This trips up nearly every consultant who researches it because the two terms are listed side by side, as if you have to pick one or the other.
An LLC is a legal entity. It separates your business from you personally, which protects your personal assets if the business is sued or owes money. By default, a single-member LLC is taxed as a sole proprietor: all of your profit flows to your personal return, and all of it is hit with the 15.3 percent self-employment tax.
An S-corp is not an entity. It is a tax election you make with the IRS, usually for an LLC you already have. It changes how your profit is taxed, not what your business legally is. You can be an LLC taxed as an S-corp, which is the most common setup for consultants who make the switch.
How the S-corp election saves on tax
As a default LLC, every dollar of profit is subject to self-employment tax. The S-corp election changes that by splitting your income into two buckets.
You pay yourself a reasonable salary through payroll, and that salary is subject to payroll taxes (the equivalent of self-employment tax). The remaining profit comes to you as a distribution, which is not subject to self-employment or payroll tax. You still pay income tax on all of it, but you avoid the 15.3 percent on the distribution portion.
A simplified example: a consultant with $120,000 in net profit might pay themselves a $70,000 salary and take $50,000 as a distribution. The roughly 15 percent self-employment-equivalent tax that would have applied to that $50,000 is reduced, which can mean several thousand dollars in annual savings.
When it is worth it, and the catch
The savings are real, but so are the costs the election adds.
An S-corp requires running payroll, filing a separate business tax return, and usually paying for bookkeeping and a payroll service. Those costs commonly run $1,500 to $3,000 a year. The election only makes sense when your tax savings clearly exceed that overhead, which is why the rule of thumb is net profit consistently above roughly $80,000. Below that, the added cost and admin usually outweigh the benefit.
The biggest rule to respect is the reasonable salary requirement. The IRS does not let you pay yourself a tiny salary and take everything as a tax-advantaged distribution. Your salary has to reflect what the work is actually worth, and paying yourself unreasonably low is a known audit trigger.
How to make the election
To be taxed as an S-corp, you file Form 2553 with the IRS. The timing matters: to apply for the current tax year, it generally must be filed within two months and 15 days of the start of that year, though late-election relief exists in some cases. Most consultants form the LLC first, then make the S-corp election once their profit clears the threshold.
How Sumly fits
The S-corp decision rests entirely on knowing your real numbers, and the salary-versus-distribution split only works cleanly when your books are organized.
Sumly keeps the money side of your consulting business in one place. Income gets organized, and expenses get categorized as they happen, so your true net profit, the number the whole LLC-versus-S-corp decision depends on, stays current instead of being a year-end estimate. When you can see your real profit clearly, the question of whether to elect S-corp status stops being guesswork.
And because Sumly is backed by in-house, licensed tax professionals, you are not making a structural tax decision based on a blog post alone. Real licensed professionals stand behind the product for exactly these questions. The tool organizes and categorizes your finances so the decision is grounded in real data, and the professionals help you read it.
Frequently asked questions
Is an S-Corp better than an LLC for a consultant? They are not competing options. An S-corp is a tax election that an LLC can make. The election can save on self-employment tax once profit is high enough to outweigh the added payroll and filing costs.
At what income does an S-corp make sense? A common rule of thumb is net profit consistently above roughly $80,000, but the exact threshold depends on your costs and situation. Run the numbers before electing.
Can I switch from an LLC to an S-Corp? Yes. You keep your LLC and file Form 2553 to elect S-corp tax treatment. You are not dissolving the LLC; you are just changing how it is taxed.
Know your real number first
The whole decision turns on your actual net profit, and most consultants do not have a clear view of it.
See your real numbers with Sumly so the LLC-versus-S-corp question is a calculation, not a guess.
Ready to spend less time on admin?
Sumly is the easiest way to track expenses, keep clean books, and run your business.