Entity Strategy 2025

LLC vs. S Corp 2025

Deciding between Default Taxation and Subchapter S: Balancing Self-Employment Tax savings against Compliance Costs and QBI Limitations.

Executive Summary

The LLC is a legal chameleon. By default, it is taxed as a Sole Proprietorship or Partnership, subjecting 100% of net income to the 15.3% Self-Employment Tax. By electing S Corp status, owners can split income into Wages (taxable) and Distributions (exempt from FICA), creating significant savings.

However, the IRS has closed the "Limited Partner" loophole for active LLC members (Soroban case), and S Corp savings must be weighed against the loss of QBI deductions and higher administrative costs.

Default LLC

Simple but Expensive: No payroll required, but you pay 15.3% tax on every dollar of profit (up to wage base).

S Corp Election

Complex but Efficient: Requires "Reasonable Salary" via payroll. Distributions are tax-free. Ideal for profits >$80k.

The Trap

Active Partners: You cannot claim "Limited Partner" exemption from SE tax if you actively manage the LLC.

SECA Tax Mechanics

The 92.35% Rule

Sole Proprietors get a small break. You only pay SE Tax on 92.35% of your net profit (to mimic the employer-share deduction C Corps get).

The Tax Stack (2025 Est.)

  • 12.4%

    Social Security

    Capped at ~$168,600 wage base. Applies to Wages (S Corp) or Net Earnings (LLC).

  • 2.9%

    Medicare

    No cap. Applies to all earned income.

  • 0.9%

    Addt'l Medicare

    Surtax on income over $200k (Single) / $250k (Married).

Active Partners & SE Tax

Can you avoid SE tax by being a "Limited Partner" in an LLC?

The Soroban Ruling (2024/25)

The Tax Court ruled that the "Limited Partner" exception (Sec 1402(a)(13)) does NOT apply if you are functionally active. If you manage the business, your distributive share is subject to SE Tax.

Guaranteed Payments

Payments for services (salary substitute) are always subject to SE tax.

Distributive Shares

For active members, these are now likely subject to SE tax too. S Corp election is the only reliable shield.

The QBI Paradox

Saving on SE Tax might hurt your Income Tax deduction.

Calculation Conflict

LLC (Default)

QBI = Net Profit

Larger QBI Deduction

S Corporation

QBI = Net Profit - Officer Wages

Smaller QBI Deduction

*Paying wages reduces the QBI base. You must weigh the 15.3% SE savings against the loss of the 20% QBI deduction.

State Tax Traps

State LLC Treatment S Corp Treatment
New York City UBT (4%) 8.85% Corp Tax (S Status not recognized)
California $800 Min + Gross Receipts Fee $800 Min + 1.5% Income Tax
Texas Margin Tax (>$2.47M rev) Margin Tax (Same)

Interactive: SE Tax Savings Simulator

Compare the total tax liability of a Default LLC vs. an S Corp.

Financials

Payroll fees, extra tax prep for S Corp.

Liability Comparison

LLC SE Tax
On 92.35% of Profit
$0
S Corp FICA
On Wages Only
$0
Net Benefit
Tax Savings - Admin Costs
$0