You've built a successful business. Now choose: S Corp or LLC? This decision affects every tax return and dollar you keep. Don't navigate alone—get guidance from CPAs who help Frederick business owners protect their success.
An LLC (Limited Liability Company) is a legal structure that protects your personal assets from business liabilities. By default, a single-member LLC is taxed as a sole proprietorship — all net profit flows to your personal return and is subject to self-employment tax (15.3% on the first $184,500 for tax year 2026, 2.9% above that).
An S-Corporation is a tax election, not a separate legal entity. An LLC can elect S-Corp taxation by filing Form 2553 with the IRS. Once elected, the owner splits income into two components: a W-2 salary and profit distributions. Self-employment tax applies only to the salary — not the distributions. That's where the savings come from.
As shown in the case study above: a business with $100,000 net profit pays $15,300 in SE taxes as an LLC. With an S-Corp election and a $50,000 reasonable salary, that drops to $7,650 — a savings of $7,650 per year.
For a deeper dive, read our post: S-Corp Election for Maryland LLCs: When It Actually Saves You Money.
The S-Corp election makes financial sense for most businesses once net profit consistently exceeds $80,000 to $100,000 per year. Below that level, the administrative costs may outweigh the tax savings. Above it, the math typically works strongly in your favor.
A business with $100,000 in net profit can save $7,650 per year in self-employment taxes. At $200,000, annual savings typically exceed $10,000. At $300,000 or more, savings can reach $15,000 to $20,000 — every single year.
The IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" — compensation that reflects what they'd earn doing the same work elsewhere. You cannot pay yourself $1 in salary and take the rest as distributions. The IRS has successfully challenged this in tax court many times.
Getting this number right is one of the most important parts of the S-Corp election. It needs to be defensible to the IRS while still being optimized for tax savings — which is exactly the analysis our tax planning team performs for every client making the switch.
For most businesses above the income threshold, these costs are modest compared to the tax savings — but they should be factored into the decision.
| Factor | LLC (Default) | S-Corp Election |
|---|---|---|
| Self-employment tax | On all net profit | Salary only |
| Separate business tax return | No | Yes (Form 1120-S) |
| Payroll required | No | Yes (owner W-2) |
| Administrative complexity | Low | Moderate |
| Tax savings potential | None | $7,500–$20,000+/yr |
| Best for income above | Under $80,000 net | $80,000+ net profit |
| Liability protection | Yes | Yes |
We see the strongest S-Corp savings for:
To elect S-Corp status for the current tax year, Form 2553 must generally be filed by March 15 of that year for calendar-year businesses. Late elections are sometimes granted but require a reasonable cause explanation.
For new businesses, the election can be made at formation or within 75 days of the business start date to be effective for the first year. Every year in the wrong structure is money you can't recover.
Maryland offers a Pass-Through Entity (PTE) tax election that allows S-Corps and partnerships to pay Maryland income tax at the entity level. This has long been valuable because it generates a federal deduction that bypasses the SALT cap — effectively letting Maryland business owners deduct more than the individual SALT limit allows.
Important 2025 update: The One Big Beautiful Bill Act, signed into law on July 4, 2025, raised the federal SALT deduction cap from $10,000 to $40,000 for tax years 2025 through 2029 (for taxpayers with income under $500,000). This is a major change — and good news is that the final bill did not eliminate or restrict the PTE workaround for S-Corps, which some earlier versions proposed.
For Maryland S-Corp owners in 2026, this means you can potentially benefit from both the higher $40,000 SALT cap on your personal return and the PTE election at the entity level — depending on your income and situation. This requires careful coordination between your federal and Maryland filings, which our tax planning team handles as part of every S-Corp engagement.
The S-Corp election typically makes sense if most of these apply to you:
If 3 or more of these apply, it's worth a conversation. We'll run your actual numbers and give you a clear answer — no obligation.
We'll run the real numbers for your specific situation and give you a clear, honest recommendation — no generic advice.
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