The first thing to understand is that LLC and S-corp aren’t really an either/or choice. An LLC is a legal entity type. S-corp is a tax classification. You can form an LLC and then elect to have it taxed as an S-corp. Most contractors who “switch to S-corp” are actually keeping their LLC and just changing how the IRS taxes it.

So the real question is whether your LLC should elect S-corp taxation. And the answer comes down to how much your business nets after expenses.

As a standard single-member LLC, you pay self-employment tax of 15.3% on your entire net profit. That covers Social Security and Medicare. On $150,000 of net income, that’s roughly $23,000 in self-employment tax alone, on top of your regular income tax.

With an S-corp election, you pay yourself a reasonable salary and take the rest as owner distributions. Payroll taxes only apply to the salary portion. If your business nets $150,000 and you pay yourself a $75,000 salary, you avoid self-employment tax on the other $75,000. That’s roughly $11,000 in annual savings.

The catch is “reasonable salary.” The IRS requires S-corp owners to pay themselves what someone in their role would reasonably earn. You can’t pay yourself $30,000 as a general contractor running half a million in revenue. The IRS knows that’s not reasonable and will reclassify your distributions as wages, plus penalties and interest.

The S-corp election also adds real costs. You need to run payroll, which means payroll processing fees and quarterly filings. You need to file a separate business tax return (Form 1120-S), which costs more than the Schedule C you file as a regular LLC. Between payroll and the additional return, expect $2,000 to $4,000 more per year in compliance costs.

That’s why the S-corp election doesn’t usually make sense until your net profit is consistently above $80,000 to $100,000. Below that, the self-employment tax savings don’t outweigh the added expense and hassle. A contractor netting $50,000 might save $3,000 in self-employment tax but spend nearly that much on the additional payroll and tax filing requirements.

For contractors with seasonal or variable income, this matters even more. If you had a strong year at $120,000 net but next year drops to $60,000, you still need to maintain payroll and file that S-corp return. The savings shrink or disappear but the obligations don’t.

There are also California-specific costs to consider. The state imposes an $800 minimum franchise tax on LLCs and S-corps alike. But S-corps in California also pay a 1.5% tax on net income, with an $800 minimum. Your Long Beach bookkeeper or CPA should factor these state-level costs into the calculation because they reduce the net benefit of the S-corp election.

If your contracting business is consistently profitable above that $80,000 to $100,000 range, the S-corp election is usually worth pursuing. But don’t just guess at it. Have someone run the actual numbers based on your revenue, expenses, and the salary you’d need to set. The right answer depends on your specific situation, and a proper tax strategy review will tell you exactly where the break-even point is and how much you’d actually save. Getting the entity structure right from the start saves you from restructuring later when the cost and complexity are higher.