S-Corp vs LLC for New Accounting Firms: Which Saves More on Taxes?
Compare S-Corp vs LLC tax savings for new accounting firms. See which structure saves more, with real numbers, steps, and a comparison table.
For a new accounting firm, the choice between an S-Corp and an LLC can significantly impact your tax bill. In most cases, an S-Corp saves more on self-employment taxes, but only if your net income exceeds a certain threshold. Below, we break down the numbers, steps, and practical advice to help you decide.
How Each Structure Is Taxed
LLC (default, taxed as sole proprietorship or partnership): Profits pass through to your personal return. You pay income tax plus self-employment tax (15.3% in 2026: 12.4% Social Security up to $176,100, and 2.9% Medicare) on all net earnings.
S-Corp: Profits also pass through, but you must pay yourself a “reasonable salary” as an employee. You pay payroll taxes (Social Security and Medicare) on that salary only. Remaining profits are distributed as dividends, which are not subject to self-employment tax. However, you must file Form 1120-S and run payroll, which adds administrative costs.
The Tax Savings: Real Numbers
Let’s assume your new accounting firm nets $100,000 in profit in 2026.
LLC: You pay 15.3% self-employment tax on the full $100,000 = $15,300.
S-Corp: You set a reasonable salary of $60,000 (common for a new accountant). Payroll taxes on $60,000 = $9,180. The remaining $40,000 is a distribution, with no self-employment tax. Total payroll tax = $9,180. Savings = $6,120.
But you also have extra costs: payroll service ($40-$100/month), unemployment insurance, workers’ comp (if required), and accounting fees. Annual extra costs often range from $1,200 to $3,000. Net savings: roughly $3,000 to $5,000.
Break-even point: If your net profit is below $40,000, the S-Corp may not save enough to cover administrative costs. Above $60,000, the S-Corp generally wins.
Comparison Table: S-Corp vs LLC for a New Accounting Firm
| Factor | LLC (Default) | S-Corp |
|---|---|---|
| Setup cost | $50-$500 (state filing) | $100-$800 (state filing + legal) |
| Annual compliance | Minimal, no payroll | $800-$2,500 (payroll, tax filing, accounting) |
| Self-employment tax | 15.3% on all net profit | 15.3% on salary only, not on distributions |
| Reasonable salary required | No | Yes, must be “reasonable” |
| Tax savings on $100k profit | $0 baseline | $3,000-$5,000 after costs |
| Best for | Net profit under $40k | Net profit over $60k |
Steps to Decide and Implement This Week
- Project your net profit for the next 12 months. Use a conservative estimate. If it’s under $40,000, stay an LLC. If over $60,000, consider an S-Corp.
- Calculate your potential savings using the formula: (Net profit - Reasonable salary) x 15.3% minus annual S-Corp costs. Use a salary of 50-70% of net profit as a starting point.
- Check your state’s rules. Some states (like California) impose an additional franchise tax on S-Corps ($800 minimum). Factor that in.
- If you decide on an S-Corp: File Form 2553 with the IRS within 2 months and 15 days of forming the LLC, or before the start of the tax year. You can also form the LLC and elect S-Corp status immediately.
- Set up payroll using a service like Gusto, ADP, or QuickBooks Payroll. Expect to pay $40-$100 per month.
- Document your salary decision. Keep records of comparable salaries for your role and location to justify “reasonableness.”
FAQ
Can I switch from LLC to S-Corp later? Yes, you can elect S-Corp status at any time, but you must file Form 2553 by March 15 of the tax year you want the election to take effect. If you miss the deadline, you may have to wait a year.
What is a “reasonable salary” for an accountant? The IRS doesn’t set a fixed number. For a new accountant, $50,000-$80,000 is typical, depending on location and experience. Use salary surveys and comparable job postings to justify your figure.
Do I have to pay myself a salary if I’m an S-Corp? Yes, if you provide services to the firm. The IRS requires you to take a reasonable salary, not just distributions, to avoid underpaying payroll taxes.
Are there any states where an LLC is always better? In states with high S-Corp franchise taxes (e.g., California), an LLC may be cheaper if your profit is under $60,000. Always run the numbers for your state.
The Bottom Line
For most new accounting firms with net profits above $60,000, an S-Corp saves more on taxes, typically $3,000 to $5,000 annually after costs. Below $40,000, the LLC is simpler and cheaper. Use the steps above to project your profit, calculate savings, and make an informed choice. If you’re unsure, consult a CPA who specializes in small business tax planning; the consultation fee is worth the clarity.