When to Transition Your LLC to an S-Corp
Written by Aparna Devalla, CPA
Curated by Rubric Financial
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The Self-Employment Tax Problem
- LLC members pay self-employment tax (15.3%) on all net business income: Social Security (12.4% up to the wage base) plus Medicare (2.9% with no cap)
- As profits grow, this becomes a significant tax burden. A founder earning $200K through an LLC pays roughly $28K in self-employment tax alone
- S-corp election allows the founder to split income between a reasonable salary (subject to payroll tax) and distributions (not subject to self-employment tax)
- The savings come from the portion of income taken as distributions rather than salary, but the IRS requires the salary to be 'reasonable' for the role
Go deeper on this topic: On Rubric Financial (our sister practice for small businesses): S-Corp Savings Calculator→
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