The Top 5 Benefits of Choosing S Corporation Status for Your LLC

The Top 5 Benefits of Choosing S Corporation Status for Your Business

If you’re running a profitable business through an LLC or sole proprietorship, choosing to elect S Corporation status could be a smart move. It’s not just a tax classification—it’s a strategic shift that could help you lower your tax bill, build long-term wealth, and put your business on a stronger compliance footing.

Here are five key benefits of S Corp status, explained in plain English.

1. You Only Pay Payroll Taxes on Your Salary—Not All Your Income

As a sole proprietor or single-member LLC, you pay self-employment tax (15.3%) on all of your net business income.

But when you elect S Corporation status for your LLC, you can pay yourself a reasonable salary, and the rest of the profit comes to you as a distribution. Distributions are not subject to self-employment tax. That means more money in your pocket.

Let’s say your business made $60,000 in net income in 2024:

You take a $15,000 salary (subject to payroll tax)
The remaining $45,000 is paid as a distribution (not subject to payroll tax)

This structure can save you thousands each year—legally and strategically. The key is to document that your salary is reasonable for the work you do. That’s where we help clients benchmark using industry and role standards.

2. Qualify for the 23% QBI Deduction (Section 199A)

With the 2025-2029 tax law now signed, business owners with pass-through income can deduct 23% of their qualified business income (QBI).

That means if your S Corp earns $100,000, you could deduct up to $23,000 right off the top. This deduction applies to LLCs, S Corps, and sole proprietorships—but S Corps often make it easier to qualify because of the way income is structured between salary and distributions.

There are income limits and phaseouts, so this is definitely a strategy to plan around. But if you’re under the thresholds or in a qualifying business, it’s one of the most powerful deductions on the table.

3. Stronger Audit Trail and Separation of Finances

S Corps require a bit more structure than a sole proprietorship. That might sound like more work, but it actually helps you long-term.

With an S Corp, you’re required to:

Run payroll
Keep business and personal finances separate
File a business tax return (Form 1120S)

This makes your business cleaner on paper and more defensible in an audit. It also forces discipline that helps business owners grow.

4. Unlock Better Retirement Options

With an S Corp, you’re both an owner and an employee. That opens up more powerful retirement plan options—like Solo 401(k)s or SEP IRAs.

You can:

Contribute as the employee (salary deferral)
Then contribute as the employer (profit sharing)

This two-part structure can supercharge your retirement savings—especially if your salary and profits are well-balanced.

5. Maximize Deductions with Accountable Plans and the Augusta Rule

Most small business owners miss out on easy deductions simply because they’re not reimbursing themselves the right way.

With an S Corp, you can set up an accountable plan to reimburse:

Home office expenses
Internet and phone usage
Business mileage
Office supplies used at home

These reimbursements are 100% tax-free to you and deductible to your business—a win-win.

And if you own your home, don’t forget the Augusta Rule: you can rent your home to your business for up to 14 days per year for legitimate business meetings or events—and the income is tax-free to you while deductible to the business. Just make sure the rate is reasonable and properly documented.

Final Thought: It’s Not Automatic—You Have to Elect S Corp Status

If you already have an LLC, you need to file Form 2553 with the IRS to elect S Corporation status. It’s not automatic. But once it’s done, the benefits can be significant.

At Taxfully, we help clients: