S-Corp vs LLC

Most people compare S-Corp and LLC as if they're the same type of thing — they're not. An LLC is a state-level legal structure. An S-Corp is a federal tax election. They operate in completely different dimensions.

This means the comparison isn't really "LLC or S-Corp" — it's almost always "LLC with default tax treatment OR LLC with S-Corp tax election." The LLC stays your legal entity either way. What changes is how the IRS taxes your income.

• LLC (default): Taxed as a sole proprietor or partnership. All net profit is subject to 15.3% self-employment tax.
• LLC taxed as S-Corp: You split income into salary + distributions. Only salary is subject to payroll taxes. Distributions are not — which is where the savings come from.

The self-employment tax savings of S-Corp treatment are the core reason most creators and freelancers make the switch. Here's a concrete example:

• Standard LLC owner with $120,000 net profit: Pays 15.3% SE tax on all $120,000 = ~$18,360 in SE taxes.
• LLC taxed as S-Corp, $70,000 salary + $50,000 distribution: Pays payroll taxes only on $70,000 = ~$10,710. SE tax on distributions = $0.
• Annual savings: ~$7,650

The higher your income above your reasonable salary, the greater the savings. At $200,000 in net profit with a $90,000 salary, the savings can exceed $15,000 per year.

Against this, you need to factor in the cost of payroll processing and the additional tax return (Form 1120-S). With a tool like Otto, those costs are manageable — and the math typically works in your favor once net income exceeds $40,000–$50,000.

A standard LLC with default tax treatment is the right choice when:

• Your net business income is below $40,000–$50,000 per year
• You're in the early stages of your business and want to keep things simple
• The cost of payroll and additional compliance would eat into your tax savings
• You prefer minimal administrative overhead

The default LLC is simple, low-cost, and still gives you the legal protection of the LLC structure. It's the right starting point for most new business owners.

Electing S-Corp tax treatment for your LLC is the right move when:

• Your net business income consistently exceeds $40,000–$50,000 per year
• You're a US citizen or permanent resident (required for S-Corp)
• You're willing to run payroll and meet the reasonable salary requirement
• You want to reduce your self-employment tax burden significantly

The S-Corp election is made by filing IRS Form 2553. For calendar-year taxpayers, the deadline is March 15 of the tax year you want it to apply. Otto guides you through our comprehensive S-Corporation services to make the transition seamless.

Whether you're starting with a standard LLC or ready to elect S-Corp status, Otto has you covered:

• LLC formation: We handle state filings, EIN registration, and operating agreement setup.
• S-Corp election analysis: We help you model the numbers to see if S-Corp status makes sense at your income level.
• Form 2553 filing: We guide you through the S-Corp election so it's done correctly and on time.
• Payroll: Otto processes your payroll once you're elected, ensuring compliance with reasonable salary requirements.
• Bookkeeping: Automated records for both salary and distributions, always tax-ready.