LLC or S-corp: which is better for a remote American?

The short answer

If you're an American earning under ~$60,000 in contractor profit per year, stay as a sole proprietor or single-member LLC. The paperwork and fees for an S-corp exceed the tax savings. Once profit is reliably above $80,000–$100,000, the S-corp election usually pays for itself through self-employment tax savings. Above that, it's rarely even close — the S-corp wins.

This is about self-employment tax, not income tax. Income tax is roughly the same across entity types. What changes is which portion of your income is subject to the 15.3% SE tax.

The three structures

1. Sole proprietorship (default)

No formation needed. You earn income, report it on Schedule C of your personal 1040, pay federal and state income tax plus 15.3% self-employment tax on net profit. No separate entity exists.

Pros: Simplest, zero setup cost, no annual filings beyond your personal return. Cons: No liability protection. Every dollar of profit is hit with SE tax.

2. Single-member LLC (SMLLC)

A state-registered entity that is "disregarded" for federal tax — it files on your personal Schedule C exactly like a sole proprietorship. Same tax treatment, but the state-law liability shield is real: if a client sues, they sue the LLC.

Pros: Liability protection, professional appearance, separate bank account easier to justify. Cons: State formation fees ($50–$500 depending on state), annual report fees ($20–$800 depending on state — California is worst at $800/year minimum franchise tax).

Tax identity: Same as sole prop. Schedule C, full SE tax.

3. S-corporation (or LLC taxed as S-corp)

A separate entity for tax purposes. You pay yourself a "reasonable salary" as a W-2 employee of your own company. That salary is subject to FICA (employer + employee halves = 15.3%). The remaining profit flows through as distributions, which are not subject to SE or FICA tax.

Pros: SE tax savings on the distribution portion. Often $5,000–$20,000 per year for a solidly profitable consultant. Cons: Must run payroll (quarterly 941s, annual W-2). Must pay yourself a "reasonable" salary — the IRS audits S-corps that show a $10,000 salary on $200,000 of profit. Annual 1120-S tax return. Higher accountant fees. Some states tax S-corps extra (California charges 1.5% on S-corp income).

The break-even math

Assume you're a single-client contractor with $150,000 of revenue and $10,000 of legitimate business expenses — $140,000 net profit.

As sole prop / SMLLC:

• Full $140,000 hit with SE tax.
• SE tax owed: roughly $19,800 (15.3% on ~$140K, with the small Medicare surcharge kicking in near the top).

As S-corp with $80,000 reasonable salary:

• $80,000 salary subject to FICA: ~$12,240 in combined employer + employee FICA.
• $60,000 distribution: zero SE/FICA.
• Total payroll tax: ~$12,240.
• Savings vs. sole prop: ~$7,560 per year.

After accountant fees ($1,500–$3,000 extra for S-corp filings) and payroll service ($600–$1,200/year), the net savings is still $4,000–$5,000. Worth it.

At $60,000 profit:

• Sole prop SE tax: ~$8,500.
• S-corp with $45,000 salary + $15,000 distribution: ~$6,900 in FICA.
• Savings: ~$1,600. Probably eaten by S-corp setup and compliance costs.

Break-even is around $75,000 of steady profit.

What "reasonable salary" means

The IRS requires S-corp owners who work in the business to pay themselves reasonable compensation. If you pay yourself too little, the IRS can reclassify distributions as wages and assess back taxes plus penalties.

"Reasonable" is judged against: what the role would earn in the local market, your hours, your responsibilities, the company's revenue. A consultant billing $200/hour at 1,500 hours a year ($300K revenue) cannot claim a $40K reasonable salary. A $120K–$150K salary would be defensible.

When in doubt, set salary at 40–50% of profit and document why — conservative, audit-friendly, and still generates meaningful savings.

State-level considerations

• California: $800/year minimum franchise tax on LLCs and S-corps. Plus 1.5% S-corp tax. Drops the S-corp advantage significantly.
• New York: Publication requirement for new LLCs (~$1,000+ one-time). S-corp requires a separate NY S-corp election.
• Tennessee: Franchise and excise tax on LLCs.
• Texas, Wyoming, Delaware, Nevada: Popular for LLCs; low or no state income tax.

Register the entity in the state where you live and work. Forming in Delaware or Wyoming when you live in California does not save California tax; you still register as foreign-qualified in California and pay.

When to switch

• Sole prop → SMLLC: Do it as soon as you have any meaningful liability exposure — signing client contracts, hiring subcontractors, or handling sensitive data.
• SMLLC → S-corp election: Once profit is reliably over $75,000–$80,000 for two consecutive years. File Form 2553 (can be back-dated within limits).
• S-corp → C-corp: Rarely, and only for specific reasons — raising outside investment, retaining earnings at lower corporate rate, stock-option planning.

Bookkeeping implications

Each step up adds bookkeeping complexity:

• Sole prop: spreadsheet or QuickBooks Self-Employed.
• SMLLC: separate bank account, bookkeeping software, annual report.
• S-corp: full general ledger, payroll, quarterly 941s, annual 1120-S, W-2 to yourself, K-1.

Budget $1,500–$3,500/year for an accountant once you're at S-corp.

The bottom line

Under $60K profit: sole prop or SMLLC. $60K–$80K: SMLLC, and start planning the S-corp election. Over $80K steady: S-corp election saves meaningful money. Over $150K: S-corp is close to non-negotiable. Reasonable salary must be defensible. Factor state compliance costs — California especially. Get an accountant before filing the S-corp election, not after.