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You formed your LLC six months ago. Business is growing. You hired two employees. Revenue hit $150,000 this year. You paid quarterly estimated taxes. Then your accountant mentions "tax election options" and asks if you've thought about s corp vs llc taxation differences.
You realize you never made a formal choice. Your single-member LLC defaulted to disregarded entity status. You're paying 15.3% self-employment tax
on all your profits. A colleague with similar revenue elected S-corp and pays half that in FICA taxes thanks to the favorable s corp tax rate. Another friend's multi-member LLC stayed as a partnership. You're now wondering: did I choose wrong?
Understanding your LLC's tax election affects how much you pay in self-employment taxes, which LLC tax form you file, how you withdraw money from the business, and your total tax liability. The wrong choice can cost thousands annually. The right choice maximizes deductions, minimizes FICA taxes, and simplifies compliance.
In this article you'll learn exactly how each LLC tax election works in 2025, which election minimizes your tax bill based on your revenue and structure, when and how to file election forms, and how to avoid costly mistakes that trigger audits or missed tax savings.
What are the default tax classifications for LLCs?
The IRS doesn't recognize "LLC" as a tax classification. When you form an LLC, the IRS automatically assigns a default tax status based on the number of owners.
Single-member LLC (one owner): Automatically taxed as a disregarded entity. The LLC itself doesn't file a separate tax return or pay taxes. All business income and expenses flow directly to your personal Form 1040 via Schedule C. The IRS treats your LLC income no different from your other personal income.
Multi-member LLC (two or more owners): Automatically taxed as a partnership. The LLC files Form 1065 (partnership return) but doesn't pay income tax itself. Income passes through to each member's personal return via Schedule K-1. Each member reports their share on Schedule E of Form 1040.
Most LLC owners never file an election form. They operate under default classification for years without realizing they have options. Default status works fine for some businesses but costs others thousands in unnecessary self-employment taxes.
How does disregarded entity status work?
A disregarded entity is a business structure the IRS ignores for income tax purposes. Your single-member LLC legally exists as a separate entity (protecting your personal assets), but for taxes the IRS treats you and your business as one person.
Tax filing requirements
File Form 1040 with Schedule C (Profit or Loss from Business). Report all business revenue and expenses on Schedule C. Pay income tax on net profit at your personal tax rates (10%-37% depending on income). Pay self-employment tax on net profit via Schedule SE. Make quarterly estimated tax payments if you owe $1,000+ annually. Schedule C is the most common LLC tax form for sole proprietors and single-member LLCs.
Self-employment tax burden
Self-employment tax rate for 2025: 15.3% on first $176,100 of net income, then 2.9% on income above $176,100.
This 15.3% breaks down as follows:
- 12.4% Social Security tax (6.2% employee portion + 6.2% employer portion)
- 2.9% Medicare tax (1.45% employee portion + 1.45% employer portion)
Additional Medicare Tax is also added as 0.9% on income exceeding $200,000 (single) or $250,000 (married filing jointly).
QBI deduction benefit
Disregarded entities qualify for the Qualified Business Income (QBI) deduction under Section 199A. You can deduct 20% of your qualified business income from your taxable income, effectively lowering your income tax (but not self-employment tax).
QBI phase-out thresholds for 2025:
- Single filers: $191,950 - $241,950
- Married filing jointly: $383,900 - $483,900
Above these thresholds, limitations apply based on W-2 wages paid and business property.
How does partnership taxation work?
When your LLC has two or more members, it's automatically taxed as a partnership unless you file an election. Partnerships are pass-through entities—income flows through to partners without the partnership itself paying income tax.
Tax filing requirements
Partnership files Form 1065 (U.S. Return of Partnership Income) annually. The key Form 1065 due date is March 15, 2025 for 2024 tax year.
Partnership issues Schedule K-1 to each partner showing their share of income, deductions, and credits. Each partner reports K-1 income on personal Form 1040 Schedule E. Partners pay self-employment tax on their distributive share via Schedule SE.
Self-employment tax for partners
All general partners pay 15.3% self-employment tax on their entire distributive share of partnership income (not just guaranteed payments). Limited partners pay self-employment tax only on guaranteed payments for services, not on their passive income share.
Even if the partnership doesn't distribute cash to you, you pay income tax and self-employment tax on your allocated share of partnership income. If the partnership earns $200,000 and you own 50%, you pay tax on $100,000 even if the partnership keeps all cash in the business.
Partnership agreements and allocations
Partnerships offer flexibility in allocating profits and losses among members. Your operating agreement can specify:
- Different ownership percentages vs. profit-sharing percentages
- Special allocations (one partner gets depreciation deductions, another gets income)
- Guaranteed payments to partners for services rendered
- Varying distribution priorities
How does the S corporation election work?
S corporation isn't a business entity—it's a tax election. Your LLC remains an LLC for legal purposes but the IRS taxes it as an S corp. This election creates the biggest tax-saving opportunity for profitable LLCs. When evaluating s corp vs llcdefault structures, understanding how the s corp tax rate works becomes essential for maximizing tax savings.
How to elect S corporation status
File Form 2553 (Election by a Small Business Corporation) with the IRS.
Deadlines for 2025:
- New LLCs: Within 75 days of formation date for election to apply in first tax year
- Existing LLCs: By March 15, 2025 for election to apply for entire 2025 tax year
- Late elections: May qualify for relief if reasonable cause exists
Example: You form LLC on February 1, 2025. To elect S corp for 2025, file Form 2553 by April 17, 2025 (75 days after formation).
S corp eligibility requirements
Your LLC must meet all requirements:
- Maximum 100 shareholders/members
- Only one class of stock (different voting rights allowed)
- All shareholders must be US citizens, US residents, certain trusts, or estates
- Cannot be a financial institution, insurance company, or international sales corporation
How S corporation taxation works
S corps are pass-through entities like partnerships. The S corp files Form 1120-S but doesn't pay corporate income tax. Income passes through to shareholders via Schedule K-1. Shareholders report K-1 income on Form 1040. The s corp tax rate structure differs fundamentally from standard LLC taxation because S corp owners split income between W-2 wages (subject to FICA taxes at 15.3%) and distributions (which avoid self-employment tax entirely).
Critical difference from partnership: S corp owners who work in the business must pay themselves reasonable W-2 wages. Only these wages are subject to FICA/self-employment taxes (15.3%). Remaining profits distributed as dividends avoid self-employment tax entirely.
The tax-saving strategy
Without S corp (disregarded entity): $150,000 net profit. You pay 15.3% self-employment tax on the entire $150,000 = $22,950 SE tax.
With S corp: $150,000 net profit. Pay yourself $80,000 reasonable W-2 salary. Distribute remaining $70,000 as dividends.
- FICA tax on salary: $80,000 × 15.3% = $12,240
- Self-employment tax on dividends: $0
- Total FICA/SE tax: $12,240
- Tax savings: $22,950 - $12,240 = $10,710 annually
The s corp tax rate advantage becomes clear when you compare FICA taxes paid on salary only versus self-employment tax paid on all LLC profits.
Reasonable compensation requirement
The IRS requires S corp shareholders who provide services to pay themselves reasonable compensation. "Reasonable" means comparable to what you'd pay an unrelated employee to do your job. Factors considered:
- Training and experience required
- Time and effort devoted
- Compensation paid by comparable businesses
- What similar businesses pay for similar services
Additional S corp costs and requirements
- Payroll processing: Must run W-2 payroll for owner-employees
- Payroll taxes: Employer pays matching 7.65% FICA (total 15.3% on wages)
- Quarterly Form 941 (payroll tax returns)
- Annual Form 940 (federal unemployment tax)
- State unemployment insurance and workers' compensation
- Payroll service fees: $500-$2,000+ annually
How does C corporation election work?
C corporation taxation is rare for small LLCs but makes sense in specific situations. Your LLC can elect C corp status by filing Form 8832 (Entity Classification Election). The c corp vs llc decision fundamentally depends on whether you plan to retain profits in the business or distribute them to owners, as this determines whether double taxation becomes a significant burden.
Double taxation structure
C corps face double taxation:
- Corporate level: C corp pays 21% federal tax on corporate profits
- Shareholder level: When profits are distributed as dividends, shareholders pay 15%-20% tax on dividends (qualified dividend rates)
When C corporation makes sense
- Retaining substantial profits in business for growth (not distributing as dividends)
- Seeking venture capital or outside investors (VCs prefer C corps)
- Planning to go public eventually
- Want to offer employee stock options and complex equity structures
- Business generates passive income exceeding certain thresholds
- Foreign ownership (S corps prohibit non-US shareholders)
- Income is below personal tax rate of 21% threshold
C corp drawbacks for most LLCs
- Double taxation on distributed profits
- More complex compliance (corporate minutes, resolutions, formalities)
- Cannot deduct business losses on personal return
- Accumulated earnings tax if retaining profits without business purpose
- More expensive accounting and tax preparation
Comparing all four tax elections
|
Factor |
Disregarded Entity |
Partnership |
S Corporation |
C Corporation |
|
Number of owners |
1 |
2+ |
1-100 |
Unlimited |
|
Self-employment tax |
15.3% on all profit |
15.3% on partner shares |
15.3% on W-2 wages only |
No SE tax |
|
Tax form filed |
Schedule C (1040) |
Form 1065 + K-1s |
Form 1120-S + K-1s |
Form 1120 |
|
Pass-through income |
Yes |
Yes |
Yes |
No (corporate tax) |
|
QBI deduction |
Yes (20%) |
Yes (20%) |
Yes (20%) |
No |
|
Payroll requirement |
No |
No |
Yes (for working owners) |
Yes |
|
Double taxation |
No |
No |
No |
Yes |
|
Complexity |
Lowest |
Moderate |
High |
Highest |
|
Annual compliance cost |
$500-$1,500 |
$1,000-$2,500 |
$2,000-$4,000 |
$3,000-$6,000+ |
Which tax election saves the most money?
The best election depends on your profit level, ownership structure, and business goals. Tax savings vary dramatically based on your specific situation, but clear break-even points exist that guide your decision. The s corp vs llc comparison becomes particularly relevant once profits exceed certain thresholds where the s corp tax rate benefits outweigh compliance costs.
Understanding the $75,000 profit threshold
For most single-member LLCs, the critical decision point falls around $75,000 in net profit annually. Below this threshold, S corp compliance costs typically exceed your self-employment tax savings. Above it, S corp elections generate meaningful returns that justify the additional complexity.
At $50,000 net profit, a disregarded entity costs you $7,065 in self-employment tax. Converting to S corp status would require approximately $3,500 in payroll processing and compliance costs. Your potential savings? Actually negative $505—you'd lose money on the election.
The math shifts dramatically at $75,000 net profit. Your disregarded entity self-employment tax jumps to $10,597. An S corp election reduces this burden by $6,097, and after subtracting $3,500 in compliance costs, you net $2,597 in annual savings.
By $100,000 in net profit, the advantage becomes undeniable. A disregarded entity costs $14,130 in self-employment tax. Setting a reasonable S corp salary of $60,000 generates only $9,180 in FICA taxes. You save $4,950 before costs, leaving a net benefit of $6,120 annually.
Tax savings at higher profit levels
When your LLC generates $150,000 in net profit, S corp election delivers approximately $8,362 in annual savings compared to disregarded entity status. You'd set a reasonable salary around $75,000, paying $11,475 in employment taxes, then distribute the remaining $75,000 completely free from self-employment tax. Compare this to paying $19,837 in self-employment tax on the full amount as a disregarded entity. Understanding the s corp vs llc tax treatment reveals that the s corp tax rate structure provides significant advantages at this revenue level.
Profits exceeding $200,000 create the maximum benefit from salary-distribution splitting. The s corp tax rate savings typically range from $10,000 to $15,000 annually at this level. Partnership or disregarded status becomes significantly more expensive once you cross into these higher profit ranges.
If your net profit consistently stays under $60,000, stick with disregarded entity or partnership taxation. S corp payroll costs, accounting fees, and compliance burdens will exceed your modest tax savings. A simple Schedule C filing keeps your costs minimal and your life simpler.
How multi-member LLCs should calculate savings
Consider a two-partner LLC generating $200,000 in total profit, with each partner receiving $100,000. Under partnership taxation, each partner pays $15,300 in self-employment tax (15.3% of their $100,000 share), totaling $30,600 combined. Add $1,500 to $2,500 in filing costs for Form 1065 and K-1 preparation.
Now compare the S corporation election for the same LLC. Set each partner's salary at $60,000, creating combined FICA taxes of $18,360. Distribute the remaining $80,000 with zero self-employment tax. You save $12,240 in taxes, subtract $3,500 to $4,000 in additional S corp costs, and net between $8,240 and $8,740 in annual savings. When analyzing s corp vs llc options for partnerships, the favorable s corp tax rate benefits become immediately clear.
The calculation changes when partners have unequal contributions or need varying profit splits. Partnership taxation offers flexibility S corps simply cannot match. If you need to allocate 70% of income to one member despite 50/50 ownership—perhaps one partner contributes more time while another contributes capital—partnership remains your only pass-through option. Special allocations, guaranteed payments, and varying distribution priorities work exclusively within partnership taxation.
How the QBI deduction affects the election
All pass-through entities—disregarded, partnership, and S corp—qualify for the 20% Qualified Business Income deduction. This deduction can shift which election proves optimal, particularly at higher income levels.
Consider a single-member LLC generating $180,000 in profit. Under disregarded entity status, you claim a $36,000 QBI deduction (20% of $180,000), reducing taxable income to $144,000. Your income tax runs approximately $28,000, plus $24,370 in self-employment tax, totaling $52,370.
Convert to S corp with a $90,000 salary and $90,000 distribution. Your QBI deduction shrinks to $18,000 because it applies only to the distribution portion—W-2 salary doesn't qualify for QBI. Taxable income rises to $162,000, generating approximately $33,000 in income tax. However, your FICA tax drops to just $13,770 (15.3% on $90,000 salary only). Total tax: $46,770, saving you $5,600 annually despite the reduced QBI benefit. The s corp tax rate advantages persist even after accounting for QBI limitations.
The key consideration: S corp elections calculate QBI exclusively on distributions, not W-2 wages. Higher salary requirements reduce your QBI benefit, which affects your overall tax savings calculation.
Your decision framework for 2025
Choose a disregarded entity when: Net profit consistently stays under $60,000, you want the simplest possible filing process, your business represents part-time or side income, or you're in a startup phase with inconsistent revenue.
Choose partnership when: You have multiple active owners, need flexible profit and loss allocations, have partners contributing different skills or capital requiring special treatment, or generate under $60,000 net profit per partner.
Choose an S corporation when: Net profit consistently exceeds $75,000, you actively work in the business full-time, revenue remains stable and predictable, annual tax savings of $5,000 to $15,000+ justify compliance costs, and you're comfortable running payroll. The s corp vs llc decision strongly favors S corp at this revenue level because the s corp tax rate structure saves thousands annually.
Choose C corporation when: Seeking venture capital investment, planning to go public eventually, retaining 100% of profits for growth without taking distributions, needing foreign investors (S corps prohibit non-US shareholders), or building substantial enterprise value for eventual sale.
How to change your LLC tax election in 2025
Changing your election requires filing specific forms within deadlines.
From disregarded entity or partnership to S corporation
File Form 2553 (Election by a Small Business Corporation).
- Deadline: March 15, 2025 for election effective entire 2025 tax year
- Or within 75 days of LLC formation for new businesses
- All shareholders/members must sign consent
- Must meet S corp eligibility requirements
From disregarded entity or partnership to C corporation
File Form 8832 (Entity Classification Election).
- Effective date: Can be up to 75 days before filing or 12 months after filing
- Check box: "A domestic eligible entity electing to be classified as an association taxable as a corporation"
- Election is permanent until you file Form 8832 to change again
From S corporation back to partnership or disregarded entity
File Form 8832 to revoke S corp status.
- Limitation: Generally cannot re-elect S corp for 5 years after revocation
- Requires shareholder consent (majority shareholders must approve)
- Consider tax implications of switching (trapped losses, built-in gains tax)
From C corporation to S corporation
File Form 2553 after revoking C corp status.
- Must first file Form 8832 to revoke C corp election
- Built-in gains tax may apply (C corp appreciation taxed when sold during 5-year period)
- Complex transition rules apply
How NSKT Global Can Help Choose Your Optimal Tax Election
NSKT Global specializes in tax planning for LLCs, helping you select and implement the tax election that minimizes your 2025 tax liability. Our team provides expert guidance on the s corp vs llc decision and helps you understand how the s corp tax rate applies to your specific business situation.
We provide comprehensive LLC tax election analysis including side-by-side projections comparing all four elections based on your actual revenue and expenses, reasonable compensation analysis for S corp elections ensuring IRS compliance, QBI deduction maximization strategies across all pass-through elections, multi-year tax planning showing long-term implications of each choice, and state tax impact analysis (some states tax S corps differently than partnerships).
We handle all election filings and implementation including Form 2553 preparation and filing for S corp elections, Form 8832 preparation for C corp elections, payroll setup and processing for S corp shareholders, ongoing compliance (Forms 1065, 1120-S, 1120, K-1 preparation), and state tax registration and filings.
Whether your LLC just launched or has operated for years under default classification, our expertise ensures you're in the optimal tax structure—saving thousands annually while staying compliant with all IRS requirements.
