LLC vs. S Corp: Which Saves More Tax in Texas?
“Should I be an S corp?” is one of the most common questions small business owners ask us. The answer depends mostly on how much profit your business makes. Here's how the two compare for a Texas business.
By the Enrolled Agents and CPAs at A&W Tax Services · Updated
First, an LLC can be an S corp
An LLC is a legal structure created under Texas law. An S corporation is a federal tax election. By default, a single-owner LLC is taxed like a sole proprietorship (Schedule C on your personal return) and a multi-owner LLC is taxed as a partnership. Either one can elect to be taxed as an S corp by filing Form 2553 — you keep your LLC and change only how it's taxed.
Where the savings come from: self-employment tax
As a default LLC, all of your net profit is subject to self-employment tax of 15.3% (Social Security and Medicare), on top of income tax. As an S corp, you pay yourself a reasonable salary through payroll, which carries the same 15.3% in payroll taxes, but the profit left over can be taken as a distribution without that 15.3%.
Example: with $80,000 of net profit, self-employment tax as a default LLC is roughly $11,300. As an S corp paying a $45,000 salary, payroll taxes on the salary are roughly $6,900 — a difference of about $4,400 before the extra costs below. Income tax is calculated differently too, so run your own numbers before deciding.
The costs and rules of an S corp
- You must pay yourself a reasonable salary for the work you do — setting it too low invites IRS scrutiny
- Running payroll, with quarterly Form 941 and annual W-2 filings
- A separate business tax return (Form 1120-S) due March 15
- More bookkeeping to keep business and personal money separate
Because of these costs, an S corp usually starts to make sense once your profit is comfortably higher than a reasonable salary for your role. For many owners that's somewhere above $50,000 a year in profit, but it depends on your industry and income.
What about Texas taxes?
Texas has no personal income tax, so the choice mainly affects your federal taxes. LLCs and corporations — including those taxed as S corps — are subject to the Texas franchise tax. Most small businesses fall below the no-tax-due threshold and owe nothing, but they still must file an annual information report with the Texas Comptroller.
Timing the election
To be an S corp for a whole calendar year, Form 2553 is generally due by March 15 of that year (two months and 15 days after the tax year starts). The IRS can sometimes accept a late election when there's reasonable cause. Talk to a tax professional before you file it — once you're an S corp, payroll has to start right away.