LLC vs S-Corp in Texas: Which Saves More Tax?

Short answer: An LLC is a legal structure, while an S-Corp is a tax election. A Texas LLC can choose to be taxed as an S-Corp. For a profitable business, this can lower self-employment taxes, but you'll have to run payroll, pay yourself a reasonable salary and file a separate business return. For many newer or lower-profit businesses, staying a regular LLC is simpler and costs less.

How a regular LLC is taxed

By default, a single-member LLC is taxed like a sole proprietorship. Profit shows up on Schedule C of your personal return. All of that profit is generally subject to self-employment tax (Social Security and Medicare) as well as income tax.

A multi-member LLC is taxed as a partnership by default. It files Form 1065, and each owner gets a K-1.

How the S-Corp election works

When an LLC elects S-Corp status (Form 2553), the business:

• Pays the owner a reasonable salary through payroll, with payroll taxes withheld
• Passes the remaining profit to the owner on a K-1, which is not subject to self-employment tax
• Files Form 1120-S each year, generally due March 15 for calendar-year businesses

The savings come from the part of your profit that isn't paid as salary.

The costs people forget

An S-Corp isn't free. Expect:

• Payroll setup and quarterly payroll filings (Forms 941, 940 and Texas TWC reports)
• A separate business tax return
• More bookkeeping discipline
• The IRS requires a reasonable salary for the work you do. Setting your salary too low is a common audit issue.

If the tax savings don't clearly beat these costs, the election may not be worth it.

When an S-Corp election often makes sense

• Your business is consistently profitable, not just in one good year
• You already pay yourself regularly
• You're willing to run payroll and keep clean books

When to wait

• The business is new or profit is unpredictable
• Profit is modest after expenses
• You're not ready for payroll and extra filings

Don't forget Texas

Texas has no state personal income tax, so the S-Corp decision is mostly about federal taxes. Either way, your LLC is generally still subject to the Texas franchise tax and must file its annual report.

Get the numbers for your business

Every situation is different, and this article is general information, not tax advice. We can compare your taxes as a regular LLC versus an S-Corp using your real numbers. Learn about our tax planning and advisory service or book a free consultation.