Business Structure
LLC vs S-Corp for Freelancers: Which Saves You More
These two terms get confused constantly because they answer different questions — one is a legal structure, the other is a tax election. Here's what actually changes, and at what income level the difference starts to matter.
"Should I get an LLC or an S-Corp?" is one of the most common questions freelancers search — and it's built on a slight misunderstanding. An LLC is a legal business structure. An S-Corp is a tax election that an LLC (or a corporation) can choose to make. You're not picking one or the other; you're potentially choosing both, in sequence.
What each one actually is
A Limited Liability Company (LLC) is a state-level legal structure that separates your personal assets from business debts and lawsuits. By default, a single-member LLC is a "disregarded entity" for tax purposes — the IRS taxes it exactly like a sole proprietorship, with profit flowing straight to your personal return via Schedule C.
An S-Corp election changes how that same LLC (or a corporation) is taxed, by filing Form 2553 with the IRS. Instead of all profit being subject to self-employment tax, the business pays you a "reasonable salary" through payroll, and any remaining profit can be distributed to you as a shareholder distribution — which isn't subject to self-employment tax.
Where the tax savings actually come from
Self-employment tax is 15.3% on 92.35% of your net earnings, with no cap on the Medicare portion. For a sole proprietor or default LLC, that applies to the entire net profit. For an S-Corp, it only applies to the salary portion — profit paid out as a distribution escapes the 15.3% SE tax entirely (though it's still subject to regular income tax).
| Default LLC / Sole Prop | LLC with S-Corp Election | |
|---|---|---|
| SE tax applies to | 100% of net profit | Only the salary portion |
| Payroll required | No | Yes — must run payroll for owner salary |
| Extra tax return | No (Schedule C on personal return) | Yes — Form 1120-S business return |
| Bookkeeping requirements | Simple | Stricter — separate payroll and distribution tracking |
| Typical added annual cost | $0 | ~$800-$2,500 (payroll service + extra tax prep) |
A worked example
Say a freelance consultant nets $100,000 in profit. As a default LLC, self-employment tax runs roughly $14,130 (100,000 × 92.35% × 15.3%). With an S-Corp election, if they pay themselves a reasonable salary of $55,000, payroll tax (the equivalent of SE tax, split employer/employee) applies only to that $55,000 — roughly $8,415 total — while the remaining $45,000 distribution avoids the 15.3% entirely. That's a rough savings in the range of $5,000-$6,000 before accounting for the added payroll and tax prep costs of $800-$2,500, netting a real savings in the low thousands.
At $40,000 in profit, the same math often doesn't clear the added administrative cost — which is why this decision is explicitly about the income level, not a universal answer.
When an S-Corp election typically starts to make sense
Many accountants point to roughly $60,000-$80,000 in net profit as the range where S-Corp tax savings begin to outweigh the added payroll and administrative burden — though the true break-even is specific to your state, your payroll provider's cost, and how "reasonable salary" is determined for your profession.
How to elect S-Corp status
If you already have an LLC, you elect S-Corp tax treatment by filing Form 2553 with the IRS, generally within 75 days of the start of the tax year you want it to apply to (or within 75 days of forming the LLC). From there, you'll need a payroll system, a separate business tax return (Form 1120-S), and — in practice — a bookkeeper or CPA who's comfortable with the added complexity.
Frequently asked questions
Free Agent Finance Editorial Team
Figures are illustrative and cross-checked against current self-employment tax rules. Always confirm your break-even with a CPA before electing S-Corp status. Have a correction? Let us know.
