The framing of “LLC vs S-corp” is misleading because they’re not mutually exclusive. An LLC is a legal structure. An S-corp is a tax election. You can form an LLC and then elect to have it taxed as an S-corporation. Most small businesses that become S-corps are actually LLCs that filed for S-corp tax treatment.

The real question is whether S-corp tax treatment makes sense for your situation.

The main benefit of S-corp status is saving self-employment tax. As a regular LLC, you pay 15.3% self-employment tax on all business profits. As an S-corp, you pay yourself a reasonable salary (which gets hit with payroll taxes) and take the remaining profit as distributions that avoid self-employment tax. If your business makes $120,000 in profit and you pay yourself $70,000, the $50,000 in distributions avoids the 15.3% tax. That’s roughly $7,650 saved annually.

But S-corp status comes with costs. You have to run payroll, which means payroll service fees, quarterly payroll tax filings, and W-2s at year end. Your tax return gets more complicated because an S-corp files its own return on Form 1120S. You also need to pay yourself a “reasonable” salary, and the IRS scrutinizes this closely. Set it too low and you risk an audit.

The general guideline is that S-corp election starts making sense when your business profits exceed around $40,000 to $50,000 after paying yourself a reasonable salary. Below that, the costs and complexity often outweigh the savings. Many New Jersey bookkeepers and accountants use similar thresholds when advising clients on this decision.

If you formed your business in New Jersey on or after December 22, 2022, there’s a streamlined process. The state now automatically recognizes your federal S-corp election, so you don’t need to file a separate state election. Entities formed before that date still need to file separately with New Jersey if they want the state to recognize their S-corp status.

This is ultimately a tax and legal decision, so your accountant should weigh in. But the financial modeling side is where we add value. Fractional CFO support includes running the numbers on what you’d actually save versus the costs of operating as an S-corp, then coordinating with your accountant to make sure the choice fits your overall tax strategy.