Tax & Compliance
When to Transition Your LLC to an S-Corp
Collated 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
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