S-CORP VS LLC. THE PAYROLL TAX MATH.
This is the most common entity structure question we get from growing subcontractors, and the answer isn't the same for everyone. An LLC taxed as a sole proprietorship or a partnership pays self employment tax, currently 15.3 percent, on all net income up to the Social Security wage base, $168,600 for 2024, and 2.9 percent on everything above that. The S-Corp election splits owner pay between a W-2 salary that carries payroll tax and distributions that don't. For most subcontractors above $150K to $200K in net income, the election saves meaningful money. It's a tax and legal decision, so confirm your own situation with your CPA or attorney before you file anything.
Here is the general math. On $300K of net income, a default LLC owner pays roughly $30,000 to $35,000 in self employment taxes. Elect S-Corp, pay yourself a reasonable salary of $120K, and payroll tax applies to the $120K instead of the full $300K. The remaining $180K in distributions avoids the 15.3 percent self employment rate, which is approximately $27K of savings before the cost of running payroll and staying compliant. That cost is why the election has a floor. Most CPAs put the breakeven at $60K to $80K in net income, and below it the paperwork can cost more than it saves.
WHAT EACH ONE DOES.
| Capability | LLC, Default Taxation | S-Corp Election |
|---|---|---|
| Self employment tax on net income | 15.3 percent up to $168,600 for 2024, 2.9 percent above it | Payroll tax on the W-2 salary only, none on distributions |
| Owner payroll required | No | Yes, a reasonable salary run through payroll |
| Tax on $300K of net income | Roughly $30,000 to $35,000 in self employment taxes | Payroll taxes on a $120K salary, with $180K taken as distributions |
| Typical savings at $300K of net income | Nothing to compare, this is the baseline | Approximately $27K, less payroll and compliance cost |
| Administrative cost | Lowest, no payroll and no election filing | Payroll processing, additional tax filings, and potentially higher accounting fees |
| Breakeven net income | Usually better below the breakeven | Most CPAs put it at $60K to $80K in net income |
| Where the audit risk sits | Little of it tied to owner pay | A salary set too low, which the IRS can reclassify as wages |
| Election deadline | Nothing to file | Form 2553, generally within 75 days of the start of the tax year |
| What the books have to do differently | Owner draws tracked on the balance sheet | Owner salary coded to jobs and overhead, distributions tracked separately |
This is general information about how the two structures are taxed, not advice about your business. Every one of these figures depends on your state, your income, and your own facts, so confirm your situation with your CPA or attorney before electing anything. SPM doesn't file tax returns and doesn't run payroll.
WHEN THE NET INCOME IS STILL SMALL.
An LLC taxed as a sole proprietorship or a partnership is the simplest structure to run. There's no owner payroll requirement, no separate election to file, and no extra return, so the administrative load stays low. The cost of that simplicity is that self employment tax applies to all net income, currently 15.3 percent up to the Social Security wage base of $168,600 for 2024 and 2.9 percent on everything above it. On $300K of net income that's roughly $30,000 to $35,000 in self employment taxes.
Below the breakeven, staying put is often the better read. Most CPAs put that breakeven at $60K to $80K of business net income, because the S-Corp election brings payroll processing, additional tax filings, and potentially higher accounting fees with it. Under those numbers the administrative cost can exceed the tax savings, and the election buys you complexity instead of money.
WHEN THE SAVINGS BEAT THE PAPERWORK.
An S-Corp lets you split your compensation between a W-2 salary subject to payroll taxes and distributions that aren't. If the business generates $300K in net income and the owner takes a reasonable salary of $120K, payroll taxes apply to the $120K and not to all $300K, and the $180K in distributions avoids the 15.3 percent self employment rate. On $180K that's approximately $27K in payroll tax savings, less the cost of running payroll and keeping the S-Corp compliant. Above $150K in net income the savings are usually large enough that most construction owners benefit, and above $200K the decision is usually clear.
The requirement that comes with it's a reasonable salary. The IRS expects an S-Corp owner-employee to pay themselves what it would cost to hire someone else to do their job. For a construction owner working in the business that's typically $80K to $150K depending on the nature of the work, the market rate for similar positions, and the revenue of the company. A salary set too low is an audit trigger, and the IRS can reclassify distributions as wages, which brings back payroll taxes, penalties, and interest with it. Your CPA determines the right number, not SPM. Some contractors elect S-Corp status with no salary and distribution strategy at all, and that's where the trouble starts.
WHERE WE COME OUT.
For most growing subcontractors, the S-Corp election starts to earn its keep somewhere above $150K to $200K of net income, and above $200K it's usually a short conversation. Below the $60K to $80K breakeven most CPAs use, the payroll and compliance cost can eat the savings. What we won't do is tell you which side of that line you're on, because the election belongs with your CPA and your attorney, who know your state, your filings, and your facts.
What we do is make sure the financial side works once the election is made. Owner salary coded correctly to jobs and to overhead, distributions tracked properly on the balance sheet, and financial statements that reflect the structure you chose. The interplay between an S-Corp salary and construction job costing takes deliberate setup in ControlQore, because owner compensation miscoded into job cost ruins every margin report you run afterward and does it without anyone noticing. That's the part contractors get wrong most often, and it's the part we own.
FREQUENTLY ASKED.
