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LLC vs S-Corp
Tax strategy

LLC vs S-Corp —
the decision that saves thousands.

The most important tax structure decision you'll make as a founder. We'll show you the real math at your income level — including Hawaii's 11% state rate — so you can see exactly what each structure costs you and when to switch.

Single-member LLC

Default tax treatment — no election needed
Self-employment tax15.3% on ALL profit
How you're paidOwner's draw — any amount
Payroll requiredNo
Separate business tax returnNo — Schedule C on 1040
Bookkeeping complexityLow
Annual accounting cost$300–800
Liability protectionYes — LLC shield
Best for profit levelUnder $40–50k/yr net
Setup cost$50 Hawaii DCCA
SEP-IRA contribution limit25% of net self-employment income
Health insurance deduction100% deductible
Audit riskLower

S-Corporation

Tax election — layered on top of your LLC
Self-employment taxOnly on salary portion
How you're paidSalary + distributions
Payroll requiredYes — reasonable salary
Separate business tax returnYes — Form 1120-S
Bookkeeping complexityHigher
Annual accounting cost$1,500–3,000
Liability protectionYes — same as LLC
Best for profit levelOver $40–50k/yr net
Setup cost$50 + Form 2553 (free)
SEP-IRA contribution limit25% of W-2 salary
Health insurance deduction100% deductible via payroll
Audit riskHigher — IRS watches salary
The S-Corp isn't a separate legal entity — it's a tax election. Your LLC stays your LLC. You file Form 2553 with the IRS and from that point forward you're taxed as an S-Corp. You can elect S-Corp status on an existing LLC at any time (subject to deadlines).
The "reasonable salary" rule is real. The IRS requires S-Corp owner-employees to pay themselves a salary comparable to what you'd pay someone else to do your job. Paying yourself too little is a red flag that triggers audits. Most CPAs recommend 40–60% of total compensation as salary.

Live tax calculator

Drag your numbers and see the real tax difference — including what you keep after all taxes and payroll costs.

$100,000
$60,000
—
$14,130
LLC self-employment tax
$9,180
S-Corp payroll tax on salary
$31,500
LLC total tax burden
$27,180
S-Corp total tax burden
$4,320
Gross tax savings
$2,820
Net savings after payroll costs

S-Corp saves you $2,820/yr after costs

At $100k profit with $60k salary — S-Corp is the better choice
S-Corp breakeven point

S-Corp makes financial sense above approximately $42,000 in annual profit — after accounting for payroll and accounting costs (~$1,500/yr).

$0 ← Breakeven: ~$42k $500k
These are estimates — your actual savings depend on your exact salary, state, deductions, and payroll provider costs. Run these numbers by your CPA before making the election.

At every income level — Hawaii example

S-Corp salary set at 55% of profit. Payroll + accounting costs estimated at $1,500/yr. Hawaii 9.3% effective state rate applied.

Annual profit LLC total tax S-Corp total tax Net savings Verdict
$20,000$7,800$9,100-$1,300Stay LLC
$30,000$11,200$12,400-$1,200Stay LLC
$40,000$14,900$15,200-$300Stay LLC
$50,000$18,700$18,100+$600S-Corp borderline
$60,000$22,600$20,800+$1,800S-Corp makes sense
$80,000$30,400$26,400+$4,000S-Corp recommended
$100,000$38,200$32,400+$5,800S-Corp strongly recommended
$150,000$57,800$48,200+$9,600S-Corp essential
$200,000$78,400$65,200+$13,200S-Corp essential
$300,000$119,600$98,400+$21,200S-Corp essential
The savings compound dramatically as income grows. A founder going from $80k to $150k profit sees their S-Corp savings nearly double. The complexity cost stays roughly the same — making the election increasingly valuable over time.
These are illustrative estimates using simplified tax calculations. Your actual tax situation depends on deductions, filing status, other income, and state-specific rules. Always verify with a CPA before making any structural changes.

How to elect S-Corp status — step by step

An S-Corp election is just a tax election — you don't dissolve your LLC or form a new company. You file Form 2553 with the IRS and from that point forward you're taxed as an S-Corp.

Your LLC stays exactly as it is. The S-Corp election only changes how the IRS taxes your income — not your legal structure, your liability protection, or your operating agreement.
!
Check the deadline first — this is critical To be taxed as an S-Corp for the current tax year, you must file Form 2553 by March 15 of that year (or within 75 days of forming your business if it's brand new). Miss the deadline and your election takes effect next year. Deadline: March 15 for current year effect
1
Download Form 2553 from the IRS Free at irs.gov/form2553. It's 3 pages. You'll need your EIN, LLC formation date, fiscal year end date, and shareholder information. For a single-member LLC that's just you. irs.gov/form2553 — free download
2
All shareholders must sign and consent Every LLC member must consent to the S-Corp election on Form 2553. Single-member LLC — that's just you. Multi-member LLCs need all members to sign on the shareholder consent statement.
3
Mail or fax to the IRS — it cannot be e-filed Form 2553 must be mailed or faxed to the IRS service center for your state. Send via certified mail and keep your receipt as proof of filing. Processing takes 2–3 months and you'll receive a CP261 notice confirming approval. Send certified mail — keep the receipt
4
Set up payroll immediately after approval Once your election is approved you must pay yourself a reasonable salary through payroll — not owner's draws. Set up payroll through Gusto ($40/mo), QuickBooks Payroll, or a local provider. Start payroll before taking any compensation. Gusto is the easiest option for most founders
5
File Form 1120-S annually by March 15 Your S-Corp must file its own annual tax return by March 15 each year. This produces a Schedule K-1 that flows to your personal return. Most founders hire a CPA for this — it's worth it given the savings. Due March 15 — one month before personal return
6
Pay quarterly estimated taxes on your distributions Your salary has taxes withheld automatically through payroll. But distributions don't — you'll need to make quarterly estimated tax payments on that portion. Use EFTPS for federal and your state's portal for state taxes. Same quarterly deadlines as before
Missed the deadline? IRS Revenue Procedure 2013-30 allows late S-Corp elections in many cases — you can file a late election with a reasonable cause statement. Your CPA can handle this. It's worth asking even if you're past March 15.

Hawaii-specific S-Corp considerations

Hawaii's 11% top income tax rate — the highest in the US — makes the S-Corp election even more valuable here than in most states. Here's the full Hawaii picture.

In Hawaii the S-Corp math is better than the federal numbers suggest. Every dollar you redirect from payroll (subject to SE tax) to distributions (not subject to SE tax) saves you on both federal and state taxes. The 11% Hawaii rate amplifies every deduction and strategy.
As LLC — $100k profit
SE tax: $14,130
Federal income: ~$11,200
Hawaii income: ~$6,800
Total: ~$32,130
Keep: ~$67,870
As S-Corp — $100k profit
Payroll tax ($60k salary): $9,180
Federal income: ~$11,200
Hawaii income: ~$6,800
Payroll costs: ~$1,500
Keep: ~$71,320
Savings: ~$3,450/yr
At $150k profit: ~$6,200/yr
At $200k profit: ~$9,400/yr
At $300k profit: ~$14,800/yr
Compounds every year
Hawaii does NOT automatically recognize your federal S-Corp election. You must also file Form N-35 (Hawaii S-Corp income tax return) annually with the Hawaii Department of Taxation by March 20. Shareholders receive Hawaii K-1s and pay Hawaii income tax on their share of S-Corp income at normal individual rates.
Hawaii S-Corp filing checklist
Fed
Form 2553 — Federal S-Corp electionFile with IRS by March 15. Federal approval required before Hawaii recognizes S-Corp status.irs.gov — mail or fax only
Fed
Form 1120-S — Federal S-Corp annual returnDue March 15 each year. Produces federal K-1s for all shareholders.
HI
Form N-35 — Hawaii S-Corp annual returnDue March 20 each year (5 days after federal). Reports Hawaii income and produces Hawaii K-1s for shareholders.Hawaii-specific — easy to miss
HI
Hawaii payroll withholdingMust withhold Hawaii income tax from your own W-2 salary and remit to DOTAX. Your payroll software (Gusto, QuickBooks Payroll) handles this automatically.
The SEP-IRA + S-Corp combination is Hawaii's most powerful tax strategy. As an S-Corp owner, your SEP-IRA contribution is based on your W-2 salary. On a $60k salary that's up to $15,000 in SEP-IRA contributions — saving $1,650 in Hawaii state tax and $3,300 in federal tax in a single move. Stack this with the S-Corp SE tax savings and the total annual benefit often exceeds $8,000–12,000.