One of the most common questions we hear from business owners across Long Island, Nassau County, and the tri-state area is this: Should I be an LLC or an S-Corp? It sounds simple, but the answer can mean the difference between paying thousands more in taxes than you need to or keeping that money in your business.
Let us break it down in plain terms.
The Basics: What Are You Actually Choosing?
First, an important clarification. When most people say “LLC vs. S-Corp,” they are really comparing two different things. An LLC (Limited Liability Company) is a legal structure. An S-Corp is a tax election. An LLC can be taxed as an S-Corp. These are not mutually exclusive.
By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC is taxed as a partnership. But you can elect to have your LLC taxed as an S-Corp by filing Form 2553 with the IRS.
So the real question is: should your business be taxed as a standard LLC (pass-through) or elect S-Corp taxation?
The Self-Employment Tax Problem
Here is the crux of the issue. When you operate as a standard LLC (sole proprietor or partnership taxation), all of your net business income is subject to self-employment tax at 15.3% (12.4% Social Security plus 2.9% Medicare) on the first $168,600 of earnings, and 2.9% above that.
On $150,000 of net profit, that is roughly $21,240 in self-employment tax alone, before you pay a dollar of income tax.
An S-Corp election changes this equation significantly.
How the S-Corp Election Works
When your LLC elects S-Corp status, the business must pay you a reasonable salary as an employee. You pay payroll taxes (Social Security and Medicare, split between employer and employee) only on that salary. The remaining profit flows to you as a shareholder distribution, which is not subject to self-employment tax.
Using the same example: if your LLC earns $150,000 and you elect S-Corp status, you might pay yourself a reasonable salary of $80,000. Payroll taxes apply to the $80,000 salary. The remaining $70,000 flows through as a distribution. Your self-employment tax savings can exceed $10,000 annually.
The key word is “reasonable.” The IRS scrutinizes S-Corp salaries heavily. You cannot pay yourself $1 in salary and take $149,999 in distributions. Your salary must reflect what you would reasonably pay someone else to do your job. A CPA can help you set this correctly.
LLC vs. S-Corp: Side-by-Side
| Factor | Standard LLC | S-Corp Election |
|---|---|---|
| Self-employment tax on all profit | Yes | No (only on salary) |
| Payroll required | No | Yes |
| Administrative complexity | Low | Higher |
| Payroll tax costs | N/A | Moderate |
| Best for lower profit businesses | Yes | Not ideal |
| Best for higher profit businesses | Not ideal | Yes |
| New York state filing required | Yes | Yes (plus payroll) |
When Does the S-Corp Election Actually Make Sense?
The S-Corp election is not right for everyone. The payroll setup, quarterly filings, and additional administrative costs need to be weighed against the tax savings. As a general rule:
- If your net business profit is under $50,000, the savings may not justify the added complexity and cost
- If your net profit is between $50,000 and $80,000, it is worth running the numbers with a CPA
- If your net profit is above $80,000 to $100,000, the S-Corp election very often makes financial sense
For many Long Island business owners, particularly in healthcare, law, consulting, real estate, and construction, we find the election pays for itself many times over.
New York-Specific Considerations
New York State adds a layer of complexity. New York recognizes S-Corp status for state tax purposes but imposes its own filing requirements and, in some cases, taxes that do not exist at the federal level. If you operate in New York City, the city also has its own business tax rules that interact with your entity structure.
This is why working with a CPA who knows New York State law, not just federal tax rules, is so important. At JRH & Associates in Garden City, we have structured hundreds of businesses across Long Island and the tri-state area and can model exactly what each election would mean for your specific situation.
The Election Deadline
To elect S-Corp status effective January 1 of a given year, you generally need to file Form 2553 by March 15 of that year for calendar-year businesses. Late elections are sometimes available, but it is better to plan ahead.
If you are starting a new business this year, you can make the election within 75 days of formation to have it effective from day one.
JRH & Associates handles S-Corp elections, payroll setup, quarterly filings, and annual returns for business owners across Long Island, Manhattan, New Jersey, and Florida. Contact us to model the savings for your business.
This article is for informational purposes only and does not constitute tax or legal advice. Every situation is different. Consult a qualified CPA before making changes to your business structure.