Should I Change From an LLC to an S Corp?
- Tax Team
- 6 days ago
- 5 min read
This is one of the most common questions I hear from business owners, usually right after they receive a larger-than-expected tax bill.
The short answer is: sometimes yes, sometimes no.The long answer is that switching from an LLC to an S Corp is not a tax “hack.” It is a strategic decision that only makes sense when the numbers, timing, and structure of your business support it.
If you are considering this move, here is how I evaluate it in real life with clients.
Who This Decision Is Really For
This conversation is primarily for business owners who are consistently owing a significant amount in taxes, or who owed a large balance last year and want to avoid repeating that experience.
In practice, I typically see this question come up when:
Net business income is at least $60,000
The owner is paying more in taxes than they expected
W-2 income plus business income is pushing them into a higher tax bracket
The business owner is organized enough to file on time every year
Service-based vs product-based businesses does not materially change the answer, and this applies nationwide, not just in Michigan.
When I Typically Start Recommending an S Corp
From a practical standpoint, I usually start exploring an S Corp election when:
Net business income is $60,000 or more, and
That income is consistent, not a one-time spike
If a business owner has W-2 income and their business income pushes them into a higher tax bracket, an S Corp often becomes part of the conversation earlier.
But income alone is not the deciding factor. Cash flow, organization, and compliance readiness matter just as much.
Common Misconceptions About S Corps
Two assumptions are almost always wrong:
“An S Corp automatically saves taxes.”
“Everyone with an LLC should switch.”
An S Corp only works when paired with intentional strategy. Without that, it can add cost, complexity, and compliance risk without meaningful savings.
Real Client Scenarios Where an S Corp Made Sense
1. Salon Owner With Booth Renters and Staff
Profile
Hairstylist and salon owner
Multiple assistants and booth renters
Net income: approximately $200,000
The problem: On paper, she netted $200,000, but after reinvesting in the salon and covering personal living expenses, her real take-home was closer to $80,000. As a Schedule C, the full $200,000 was subject to self-employment tax.
What changed with an S Corp
Reasonable salary set at $80,000
Remaining $120,000 treated as distributions
Tax impact
Self-employment tax avoided on $120,000
Approximately $18,360 in tax savings
This worked because her business had scale, staff, recurring income, and profits that exceeded her personal labor value.
2. Event Planner Acting as a Middleman
Profile
Event planner
Independent contractors performed most labor
Net income: approximately $300,000
The problem: As a Schedule C, she was paying self-employment tax on nearly all $300,000, even though her personal labor value was much lower.
What changed
Salary set based on industry norms for coordination and management
Remaining profit flowed as distributions
Why it made sense: She wasn’t earning $300,000 in labor. She was operating a system. The S Corp aligned taxation with economic reality.
3. Physicians Doing Locum Tenens on the Side
Profile
W-2 income already over $250,000
Additional 1099 locums income
The benefit: At high income levels, the S Corp wasn’t just about self-employment tax. It allowed access to:
Employer-paid health insurance
Employer retirement contributions
Section 125 and accountable plans
This became a benefits optimization strategy, not just a tax savings move.
When I Advise Clients Not to Switch
1. Real Estate Professionals With Heavy Depreciation
Rental income typically belongs on Schedule E, not in an S Corp. Depreciation often already shields taxable income. Forcing real estate into an S Corp can:
Complicate basis tracking
Eliminate passive loss advantages
Add payroll complexity with no benefit
2. Business Owners Netting Around $60,000
In some cases, the QBI deduction offsets much of the tax burden. After payroll costs, compliance, and accounting fees, the S Corp provides little to no net benefit.
Switching “for discipline” is not strategy.
My Practitioner Rule of Thumb
I generally do not recommend an S Corp when:
QBI materially offsets tax liability
Net income is under $75,000–$100,000
The business has heavy depreciation or losses
The motivation is convenience, not savings
I do recommend exploring an S Corp when:
Net income consistently exceeds living needs
Owner labor value is lower than total profit
The business has systems, staff, or recurring revenue
There is an opportunity to layer employer-only benefits
What Changes After You Become an S Corp
This is where many people are caught off guard.
You must pay yourself reasonable compensation via W-2
You cannot simply transfer money to yourself
Payroll taxes must be filed and paid quarterly
The business return is due March 15, not April 15
Compensation must align with industry standards
This structure comes with more deadlines, more compliance, and more scrutiny.
Common Mistakes When People Switch Too Early
Not paying themselves on a W-2
Missing payroll filings and incurring penalties
Believing they can switch back and forth year to year
Assuming the structure alone saves money
An S Corp requires implementation. Without strategy, it is just paperwork.
Why This Is a Tax Strategy Decision, Not a Tax Prep Decision
Your S Corp election must be made before March 15 of the tax year. By the time tax season arrives, the opportunity has already passed.
This is why entity decisions should never be made during filing season.
The Bigger Financial Picture
For the right business owner, an S Corp can save real money. For example:
A business netting $100,000 may save around $10,000 with proper structure and reasonable compensation
But savings only happen when the business is prepared to support the structure.
The Real Question Behind “Should I Switch?”
What people are really asking is:
Is this worth the extra deadlines, payroll, scrutiny, and compliance?
Sometimes the answer is yes. Sometimes it is no.
That is why this decision should be evaluated with real numbers, not assumptions.
Final Thought
An S Corp is not a badge of success. It is a tool. Used at the right time, it can significantly reduce taxes. Used too early or without guidance, it can create more problems than it solves.
If you are considering this move, the next step is not switching structures.It is understanding whether it actually makes sense for you.
Thinking About Switching to an S Corp?
If you’re trying to decide whether an S Corp will actually save you money or just add complexity, a tax strategy conversation can help you evaluate the numbers before it’s too late to act for the year.
👉 Book a Consultation to review your income, structure, and next steps.