S-Corp vs LLC for New Consulting Firms: Which Saves More on Taxes?
Compare S-Corp and LLC tax structures for new consulting firms. Learn which saves more on taxes, with realistic 2026 figures and practical steps.
For a new consulting firm, the choice between an S-Corp and an LLC often comes down to tax savings. The short answer: an S-Corp can save you more on self-employment taxes once your net income exceeds roughly $40,000 to $50,000 per year, but an LLC is simpler and cheaper to run at the start. Below, we break down the numbers, the trade-offs, and the steps you can take this week to decide.
How LLCs and S-Corps Are Taxed
A single-member LLC is a pass-through entity by default. You report business profit on Schedule C of your personal tax return, and you pay both income tax and self-employment tax (15.3% in 2026) on the entire net profit. The self-employment tax covers Social Security and Medicare, and it applies to 92.35% of your net earnings.
An S-Corp is also a pass-through entity, but it lets you split your income into two parts: a reasonable salary and distributions. You pay payroll taxes (Social Security and Medicare) on the salary only, not on the distributions. This can reduce your self-employment tax burden.
The Tax Savings Math for 2026
Let’s use realistic 2026 figures. The Social Security wage base is $176,100, and the self-employment tax rate is 15.3% (12.4% for Social Security, 2.9% for Medicare). For simplicity, assume a single-member LLC with $80,000 in net profit.
- LLC: You pay self-employment tax on 92.35% of $80,000, which is $73,880. At 15.3%, that’s $11,304.
- S-Corp: You pay yourself a reasonable salary of $60,000 (a common range for consultants). Payroll taxes on $60,000: Social Security is 12.4% up to $176,100, so $7,440, plus Medicare 2.9% on the full $60,000, which is $1,740. Total payroll tax: $9,180. The remaining $20,000 is a distribution, with no payroll tax. Total payroll tax: $9,180.
In this example, the S-Corp saves $2,124 in payroll taxes. But you also have additional costs: payroll processing, unemployment insurance, and accounting fees. These typically run $1,000 to $2,000 per year, so the net savings might be $100 to $1,000. As your income grows, the savings increase. At $150,000 net profit, the S-Corp could save $5,000 to $7,000 annually, even after extra costs.
When an LLC Is the Better Choice
If your consulting income is below $40,000 per year, the S-Corp’s extra costs often outweigh the tax savings. Payroll setup alone can cost $500 to $1,500, and you must file payroll tax returns quarterly. Also, an S-Corp requires you to pay yourself a “reasonable salary,” which the IRS defines as what a comparable employee would earn. If you set it too low, you risk an audit. For a new firm with variable income, the LLC’s simplicity is a real advantage.
When an S-Corp Is the Better Choice
Once your net income consistently exceeds $50,000, the S-Corp starts to pay off. You can save 2.9% (Medicare) on the distribution portion, and up to 12.4% (Social Security) if your salary is below the wage base. For a consultant earning $120,000, the savings can be $3,000 to $5,000 per year. Also, an S-Corp can help you deduct health insurance premiums more cleanly, and it may make you look more established to clients.
Comparison Table: LLC vs S-Corp for a New Consulting Firm
| Factor | LLC (Single-Member) | S-Corp |
|---|---|---|
| Setup cost | $50-$200 (state filing) | $100-$500 (state filing + corporate formalities) |
| Annual compliance | $0-$100 (annual report) | $300-$1,000 (payroll, tax filings, annual report) |
| Self-employment tax | 15.3% on all net profit | 15.3% on salary only, 0% on distributions |
| Tax savings potential | None | $2,000-$7,000/year at $100k+ profit |
| Complexity | Low | Moderate (payroll, corporate minutes) |
| Best for | Income under $40k, simplicity | Income over $50k, tax optimization |
Steps to Take This Week
- Project your 2026 net profit. Use a conservative estimate. If it’s under $40,000, stick with an LLC. If it’s over $50,000, consider an S-Corp.
- Get a quote from a CPA. Ask for a comparison of your specific tax liability under both structures. Most CPAs charge $150-$300 for this analysis.
- Check your state rules. Some states impose additional taxes on S-Corps (e.g., California’s 1.5% franchise tax). Your CPA can factor this in.
- If you choose an S-Corp, file Form 2553. You must file within 75 days of formation or by March 15 of the tax year you want the election to take effect. If you’re already operating as an LLC, you can convert later, but there may be tax implications.
FAQ
Can I switch from an LLC to an S-Corp later? Yes, you can file Form 2553 to elect S-Corp status. The election must be made within 75 days of formation or by March 15 of the current tax year. There are no federal tax consequences for the conversion, but your state may require a new filing.
What is a “reasonable salary” for a consultant? The IRS doesn’t set a fixed number, but a common rule of thumb is 60% to 80% of net profit. For example, if your net profit is $100,000, a reasonable salary might be $60,000 to $80,000. Your CPA can help you justify it based on industry data.
Do I need to pay myself a salary if I’m an S-Corp? Yes, if you provide services to the corporation, you must pay yourself a reasonable salary. You cannot avoid payroll taxes by taking only distributions.
Are there any downsides to an S-Corp? Yes: more paperwork, payroll costs, and the risk of IRS scrutiny on your salary. Also, you must have a board of directors and hold annual meetings, even if you’re the only shareholder.
The Bottom Line
For a new consulting firm, the decision hinges on your projected income. If you expect to net less than $40,000, an LLC is the cheaper, simpler choice. If you expect to net more than $50,000, an S-Corp can save you thousands in self-employment taxes, even after accounting for extra costs. Run the numbers with a CPA, and make the election that fits your cash flow and growth plans.