Summary of What This Blog Covers
- LLCs are simple but tax all profits as self-employment income.
- S-Corps reduce taxes by splitting income into salary and distributions.
- S-Corps require payroll and IRS compliance but offer big savings.
- Profits over $75K often justify switching to an S-Corp.
Let’s talk structure and not the kind holding up your office walls. I’m talking about the financial foundation of your business. Your entity. Your legal status. Your tax identity.
Because let’s face it: the structure you chose when you were just getting started may not be serving the profitable business you’re running today. And if you’re still rocking a basic LLC while pulling in serious revenue? That structure might be draining your bank account one tax quarter at a time.
Here at Insogna CPA, one of the top CPA firms in Austin, Texas, we specialize in working with business owners just like you—ambitious, growing, and ready to move from reactive to strategic. One of the most common conversations we have is about whether it’s time to switch from an LLC to an S-Corporation (S-Corp).
Spoiler alert: if you’re earning over $75K in net profit, it probably is.
But before you make a move, let’s unpack everything. The pros. The cons. The math. The IRS expectations. And most importantly, how to know what’s best for your business.
What Exactly Is an LLC?
A Limited Liability Company (LLC) is a legal entity that protects your personal assets if something goes wrong in your business. It separates you from your company in the eyes of the law, and it’s the go-to option for new businesses because it’s:
- Easy to form
- Flexible to manage
- Inexpensive to maintain
By default, if you’re a single-member LLC, the IRS treats you as a sole proprietor for tax purposes. That means you:
- Report income on Schedule C of your personal tax return
- Pay 3% self-employment tax on every dollar of net profit
And yes, that’s before income tax.
Let’s do the math.
LLC Tax Example:
You earn $100,000 in profit.
Self-employment tax (15.3%) = $15,300
Then add income tax (based on your bracket).
It adds up fast. And when you’re crossing the $75K–$100K threshold? That tax burden starts to feel like a weight around your growth.
Enter the S-Corp: Your Tax Strategy Power Move
Here’s where it gets good. An S-Corp isn’t a business type, it’s a tax election you file with the IRS using Form 2553. It allows your LLC to keep its legal structure while changing how your income is taxed.
The magic of an S-Corp lies in how you get paid.
As an S-Corp:
- You pay yourself a reasonable salary, subject to employment taxes
- Any remaining profit is paid to you as a distribution, which is not subject to self-employment tax
That alone can save you thousands.
S-Corp Tax Example:
Profit: $120,000
- Salary: $60,000 → taxed for Social Security and Medicare = $9,180
- Distribution: $60,000 → no SE tax
Total SE tax: $9,180 instead of $18,360
Tax savings: $9,180
Multiply that over a few years, factor in state taxes, and we’re talking about potentially tens of thousands back in your pocket.
Our team of Austin, TX accountants can break down the exact numbers for your business. We don’t do generic advice. We do personalized strategy.
When Is It Time to Elect S-Corp Status?
Not every business is ready for S-Corp status, and there are costs to consider. S-Corps require:
- Running payroll
- Filing separate business tax returns (Form 1120-S)
- Quarterly employment tax filings
- Setting a fair market salary for yourself
So when do the tax savings outweigh the compliance costs?
General Rule:
- Under $50K in net profit? Stick with an LLC.
- Over $75K? It’s time to crunch numbers.
- Over $100K? You’re almost certainly overpaying taxes without an S-Corp.
At Insogna CPA, our small business CPAs in Austin run these calculations for clients every day. We take your revenue, your industry, and your growth goals into account before making a recommendation.
How the IRS Views S-Corp Owners
Let’s talk compliance. The IRS loves rules and they’re serious about enforcing them. Here’s what they expect from every S-Corp:
1. Reasonable Salary
You must pay yourself a fair market wage. That means:
- What someone in your role, with your responsibilities, would earn in your market
- Based on industry standards and your business’s profitability
If you pay yourself too little, the IRS can reclassify your distributions as wages and hit you with penalties and back taxes.
2. Accurate Payroll
You’ll need to:
- Run W-2 payroll
- Withhold and remit employment taxes
- File quarterly forms with the IRS
Our Austin accounting service handles all of this for you from calculating payroll to filing your W-2s and 941s. You get the benefit without the burden.
Additional Tax Benefits of S-Corp Status
Now let’s go beyond the basics. The tax savings don’t stop at payroll.
1. Health Insurance Deductions
As an S-Corp owner, you can deduct 100% of your health insurance premiums if structured correctly through payroll.
2. Retirement Contributions
With an S-Corp, you can:
- Contribute to a Solo 401(k) or SEP IRA
- Maximize both employee and employer contributions
- Lower your taxable income while saving for the future
3. Qualified Business Income (QBI) Deduction
As of 2025, S-Corp owners under $191,950 (single) or $383,900 (married) may qualify for the 20% QBI deduction, reducing taxable income dramatically.
This deduction can be complex, especially for service-based businesses. Our team of certified professional accountants will run the math and keep your business in the safe zone.
S-Corp Pitfalls to Watch Out For
Even great tax strategies come with risks if they’re executed poorly.
Mistake #1: Ignoring Payroll
If you make the S-Corp election but never pay yourself a W-2 salary, you’re asking for IRS trouble.
Mistake #2: Choosing S-Corp Too Early
If your income is still inconsistent or under $50K, the admin costs may outweigh the tax benefit.
Mistake #3: Using S-Corp for Passive Real Estate
Long-term rental income is not subject to SE tax so S-Corp status won’t help, and it may hurt your ability to deduct losses.
This is why our tax advisors in Austin take a consultative approach. We don’t sell S-Corps, we recommend them when they work and help you pivot when they don’t.
So… LLC or S-Corp?
Let’s simplify it.
Stick with an LLC if:
- You’re still getting traction
- You’re making under $50K annually
- You want low-cost, low-admin, straightforward tax filings
Elect S-Corp status if:
- You’re earning $75K+ in net profit consistently
- You want to lower your self-employment tax burden
- You’re ready to run payroll (or want us to do it for you)
- You’re serious about building long-term wealth
How Insogna CPA Makes It Easy
At Insogna CPA, one of the top-rated CPA firms in Austin, Texas, we walk business owners through this transition every single day.
Here’s what we handle:
- Filing Form 2553 for S-Corp election
- Setting up and running payroll
- Filing quarterly and year-end forms
- Calculating a reasonable salary
- Managing FBAR filing, deductions, and IRS compliance
- Offering ongoing strategy for your income, deductions, and retirement planning
Looking for a tax accountant, a CPA office near you, or a licensed CPA who explains things like a human? You found us.
Is Your Business Structure Helping You or Holding You Back?
Choosing the right entity structure isn’t just a legal decision. It’s a financial one and it can mean the difference between stagnating under the weight of taxes or unlocking cash flow for reinvestment, retirement, or just a little more breathing room.
We’re here to guide that choice.
Whether you’re a solo consultant making your first $100K, a creative running a six-figure studio, or a small team scaling fast, your business deserves a structure that fuels your success, not one that drains it.