by Cindy Yu, CPA/CFP, Partner of CINDIE & EliteCPA

 http://www.cindiecpa.com  http://www.elitecpapc.com

Impact on the Taxes

To determine whether an S Corporation (S Corp) or a Single-Member LLC (disregarded entity) is more tax-advantageous to a business owner with $100,000 net income, let’s compare both from a U.S. federal tax perspective (assuming the owner is a U.S. resident individual):

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📌 Summary Table:

Factor	Single-Member LLC	S Corporation
Federal Tax Treatment	Disregarded entity – taxed as sole proprietorship on Schedule C	Pass-through entity – files Form 1120S, income reported on Schedule K-1
Self-Employment Tax	Applies to entire $100,000	Applies only to reasonable salary portion
Payroll Setup	Not required	Required for owner-employee
Reasonable Salary Required	❌ No	✅ Yes
Distributions (no SE tax)	❌ N/A	✅ After salary, remaining profits can be distributed without SE tax
Additional Admin Costs	Low	Higher (payroll, extra tax filings, compliance)

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💰 Tax Impact Comparison (Assuming $100,000 Net Income)

🔹 Single-Member LLC (default)

• Self-Employment Tax (15.3%) on full $100,000:
  → ≈ $15,300
• Federal Income Tax (assumed 22% for illustration):
  → ≈ $22,000
• Total Estimated Taxes: ≈ $37,300

🔹 S Corporation (assume $60,000 salary, $40,000 distribution)

• FICA Tax on $60,000 salary:
  → Employer + Employee share ≈ $9,180 (7.65% x 2)
• No SE tax on $40,000 distribution
• Federal Income Tax on full $100,000:
  → ≈ $22,000
• Total Estimated Taxes: ≈ $31,180

🟢 Savings with S Corp:
≈ $6,000+ (mainly by avoiding SE tax on $40,000)

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✅ When S Corp Is Better:

• You’re earning $50K+ annually in net profit
• You’re comfortable with payroll setup & compliance
• You want to reduce self-employment tax legally

⚠️ Watch Out:

• You must pay yourself a reasonable salary (IRS scrutiny)
• Additional costs: payroll service, 1120S filing, possible state-level S corp fees
• Some states tax S corps differently (e.g., California has a minimum S corp tax)

Impact on Retirement Plan Contribution

Adding a retirement plan contribution changes the comparison between an S Corp and a Single-Member LLC—especially when using self-employed retirement plans like a Solo 401(k) or a SEP IRA.

Let’s break it down:

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✅ Overview of Retirement Contribution Options

Plan Type	Single-Member LLC (Schedule C)	S Corporation
Solo 401(k)	Up to:
– $23,000 employee deferral (under age 50)
– + 20% of net SE income as employer contribution	Up to:
– $23,000 employee deferral (W-2 salary)
– + 25% of W-2 salary as employer contribution
SEP IRA	Up to 20% of net SE income	Up to 25% of W-2 salary

Assumes 2025 IRS contribution limits; age < 50.

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💰 Example Scenario: $100,000 Net Business Income

Let’s assume:

• Under 50 years old
• You want to contribute the maximum retirement amount
• You’re the only employee/owner

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🔹 Single-Member LLC (Disregarded Entity)

• Net Schedule C income: $100,000
• Adjust for 1/2 SE tax: ~$92,350
• Solo 401(k):
  • $23,000 (employee)
    • ~$18,470 (20% of adjusted SE income)
• Total Retirement Contribution: ≈ $41,470
• Tax deduction reduces income subject to SE and income tax
• SE tax still applies to full net income

🧮 Estimated tax savings:

• Reduces taxable income to ≈ $58,530
• Self-employment tax ≈ $14,000
• Federal income tax ≈ $12,800
• Total taxes ≈ $26,800
• With $41,470 in retirement savings

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🔹 S Corporation (Assume $60,000 salary, $40,000 distribution)

• Solo 401(k):
  • $23,000 (employee deferral)
    • $15,000 (25% of $60,000 salary)
• Total Contribution: $38,000
• Retirement contribution is a corporate deduction (lowers net corp income)
• SE tax (FICA) applies only to $60,000 salary: ≈ $9,180
• Federal income tax applies to full $100K, but K-1 income drops to ≈ $22K
• Total taxes ≈ $24,180
• With $38,000 in retirement savings

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🔍 Tax Comparison Summary with Retirement Contribution

Metric	Single-Member LLC	S Corp
Total Retirement Contribution	~$41,470	~$38,000
Self-Employment / FICA Tax	~$14,000	~$9,180
Income Tax (est. 22%)	~$12,800	~$15,000
Total Tax Liability	≈ $26,800	≈ $24,180
Net Advantage		✅ ~$2,600 saved

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🧾 Final Conclusion:

• S Corp still has a slight edge in overall tax savings due to lower SE tax.
• LLC can make slightly larger retirement contributions (due to including net business income instead of W-2 limits).
• If maximizing retirement savings is your #1 goal, LLC wins by ~$3,470 in contribution room.
• If reducing total tax liability is the goal, S Corp wins by ~$2,600.