Should my consulting business be an LLC or S-corp?
The question itself contains a common misconception. LLC is a legal structure that provides liability protection. S-corp is a tax classification. You can have an LLC that elects to be taxed as an S-corp. Most consultants end up with exactly that combination.
When you form an LLC and don’t make any special elections, the IRS treats it as a sole proprietorship for tax purposes. All your profit flows to your personal return and you pay self-employment tax on the entire amount. That’s 15.3% for Social Security and Medicare on top of your income tax. When consulting revenue is strong, this becomes a significant expense.
S-corp taxation changes how you get paid. You pay yourself a reasonable salary, which gets hit with payroll taxes just like any employee. The remaining profit passes through as a distribution without self-employment tax. If your consulting business nets $100,000 and you pay yourself a $55,000 salary, you avoid self-employment tax on the other $45,000. That saves roughly $6,900 per year.
The catch is the reasonable salary requirement. The IRS expects S-corp owners who perform services to pay themselves what the market would pay for that work. You cannot set your salary artificially low to maximize distributions. What counts as reasonable depends on your experience, the type of consulting you do, and what comparable consultants earn. A Boise area enrolled agent can help you determine an appropriate salary based on your specific situation.
S-corp election adds complexity. You’ll need to run payroll, make quarterly payroll tax deposits, file quarterly payroll reports, and file a separate S-corp tax return in addition to your personal return. These requirements have real costs in time and money. If your tax savings don’t exceed these costs, the election isn’t worth it yet.
A common threshold is $40,000 to $50,000 in net profit after paying yourself a reasonable salary. Below that, the administrative burden and additional filing costs often eat up most of the savings. Consulting businesses tend to hit this threshold earlier than other industries because margins are typically high and overhead is low.
Before making the election, think through the full picture. Consider your current income, projected growth, what reasonable salary means for your type of consulting, and whether you want to deal with payroll compliance. New business strategy work at the start can save you from electing too early or waiting too long. The right timing depends on your specific numbers, not a general rule.
The Treasure Valley's Tax and Accounting Team
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