When a Texas LLC should elect S-Corp

"Should I be an LLC or an S-Corp?"

I get this question weekly from DFW business owners. And here's the thing: the right answer depends on your profit, the salary you can defend and what an S-Corp costs to run. Get it wrong and you'll either pay unnecessary taxes or drown in paperwork that wasn't worth it.

The short answer: LLC and S-Corp aren't either/or. An LLC is a legal structure. S-Corp is a tax election. You can be an LLC that's taxed as an S-Corp—and that combo is often the sweet spot.

Let me show you exactly when it makes sense (and when it doesn't), with real numbers from businesses right here in Plano, Richardson, and Dallas.

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The basics (without the jargon)

What is an LLC?

Think of an LLC as your legal armor. It's a business structure that keeps your personal stuff (house, car, savings) separate from your business liabilities. If your business gets sued, they can't come after your personal assets.

Setting one up in Texas is straightforward—about $300, file online with the Secretary of State, done.

Here's the catch: by default, the IRS treats your LLC like it doesn't exist. You're taxed as a sole proprietor, which means you pay self-employment tax on everything you earn.

What is an S-Corp?

An S-Corp isn't a business structure—it's a tax election. You tell the IRS, "Hey, tax me differently."

When you make this election, you split your income into two buckets:

1. Salary (you pay payroll taxes on this)
2. Distributions (you don't pay self-employment tax on this)

That split is where the savings come from. But you can't just "form an S-Corp"—you form an LLC first, then elect S-Corp tax treatment.

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The tax difference that matters

The main benefit of S-Corp taxation is self-employment tax savings.

How self-employment tax works

As a sole proprietor or standard LLC, you pay self-employment tax (Social Security + Medicare) on all your business profit:

• Social Security: 12.4% on the first $184,500 of earnings (the 2026 wage base)
• Medicare: 2.9% on all income
• Additional Medicare: 0.9% on earnings over $200,000 if single, $250,000 if married filing jointly or $125,000 if married filing separately (wages and self-employment earnings count together)

Total: 15.3% on most of your profit. Self-employment tax is figured on 92.35% of net profit, so the tax on $100,000 of profit is $100,000 × 0.9235 × 15.3%.

How S-Corp changes this

With S-Corp election, you split your income into two parts:

1. Salary — Subject to payroll taxes (same as self-employment tax)
2. Distributions — NOT subject to self-employment tax

You pay the 15.3% on your full salary, half through your paycheck and half by the S-Corp, and none on distributions.

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Real numbers: When S-Corp saves money

Let's look at a DFW consultant earning $120,000 in net profit.

Scenario A: Standard LLC (sole proprietor taxation)

• Net profit: $120,000
• Self-employment tax: $120,000 × 0.9235 × 15.3% = $16,955
• Income tax: Varies by bracket

Scenario B: LLC with S-Corp election

• Net profit: $120,000
• Reasonable salary: $60,000
• Payroll taxes on salary: $60,000 × 15.3% = $9,180
• Distribution: $60,000 (no self-employment tax)

Difference: $7,775 a year, before the S-Corp's running costs.

Running costs (payroll service, a separate business return, extra bookkeeping) come out of that, and the salary has to be one you can defend. Results vary.

What about the QBI deduction?

The 20% qualified business income deduction is figured on business profit, and your S-Corp salary doesn't count as qualified business income. So paying yourself a salary lowers the deduction. In Scenario B, about $60,000 of salary drops out of the QBI base; that trade-off belongs in the math before you elect.

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The "reasonable salary" requirement

The IRS requires S-Corp owners to pay themselves a "reasonable salary" before taking distributions. This prevents people from paying $0 salary and taking all profit as distributions.

What's considered reasonable?

Reasonable salary depends on:

• Your role in the business
• Industry standards for similar positions
• Geographic location (DFW market rates)
• Your experience and qualifications
• Time spent working in the business

There's no percentage rule

The IRS doesn't set a salary percentage. A reasonable salary is what the business would pay someone else to do your job, given your duties, hours and DFW market rates. Profit isn't the yardstick; the work is.

Example: A marketing consultant earning $150,000 might pay themselves $70,000-$90,000 in salary.

What happens if salary is too low?

If the IRS determines your salary is unreasonably low, they can:

• Reclassify distributions as wages
• Assess back payroll taxes
• Add penalties and interest

This is why working with a CPA who understands reasonable compensation is critical. Calculate your reasonable salary range →

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When S-Corp election makes sense

S-Corp isn't right for everyone. Here's when it typically makes sense:

Green light: Consider S-Corp if...

• Net profit is steady, and your numbers show the payroll-tax difference covering the running costs
• Your business is stable (not a one-time windfall)
• You can handle the additional compliance requirements
• You're okay paying yourself a regular salary
• You plan to stay in business for several years

Yellow light: Maybe wait if...

• Net profit is modest (the payroll-tax difference may not cover the running costs)
• Your income fluctuates significantly year to year
• You're just starting out and profit is uncertain
• You have significant business losses to carry forward

Red light: Probably not right if...

• Net profit is low (payroll and the extra return can cost more than the payroll-tax difference)
• You're a real estate professional (special rules apply)
• You have multiple owners with complex profit-sharing
• Your business is primarily passive income

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The hidden costs of S-Corp

S-Corp election comes with additional requirements and costs:

Ongoing compliance costs

• Payroll processing: $30-100/month for software or service
• Quarterly payroll tax filings: 941 forms each quarter
• Annual W-2 filing: For yourself (and any employees)
• Reasonable compensation documentation: Keep records
• Separate business bank account: Required for clean records

Additional tax preparation

S-Corp returns (Form 1120-S) are more complex than Schedule C. Expect to pay:

• $500-1,500 more annually for tax preparation
• Additional time gathering payroll records

Break-even analysis

For S-Corp to be worthwhile, your tax savings must exceed your additional costs.

Example:

• Additional annual costs: $2,500
• Minimum savings needed: $2,500+
• At 15.3% tax rate, you need at least $16,300 in distributions to break even

There's no single break-even number. It depends on your profit, the salary you can defend and what the S-Corp costs to run. At lower profit, payroll and the extra return can cost more than the payroll-tax difference. Try your numbers in the calculator, then talk it through with Krystal.

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How to make the S-Corp election

Timing is critical

To have the election apply to a tax year, file Form 2553 no later than 2 months and 15 days after that tax year begins. For a calendar-year business, that's March 15. For a new LLC, the clock starts when its first tax year begins. You can also file any time in the year before.

Miss the deadline? The election applies to the next tax year instead, unless you qualify for the IRS's late-election relief.

The process

1. Ensure your LLC is properly formed in Texas
2. Obtain an EIN from the IRS if you don't have one
3. File Form 2553 with the IRS (signed by all owners)
4. Set up payroll for yourself
5. Run payroll regularly (at least quarterly, monthly recommended)
6. Keep clean records separating salary from distributions

State considerations (Texas)

Texas doesn't have a state income tax, but you still need to:

• File the Texas franchise tax Public Information Report or Ownership Information Report by May 15 each year. For reports due in 2026 and 2027, a business with annualized total revenue of $2.65 million or less owes no franchise tax. This is the same for an LLC and an S-Corp.
• Maintain your LLC's good standing with the Secretary of State
• Keep registered agent information current

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Common mistakes to avoid

Mistake 1: Electing S-Corp too early

Don't elect S-Corp status before your business is profitable enough. The compliance costs will outweigh any savings.

Wait until: Your profit has been steady for a couple of years and you've run your numbers.

Mistake 2: Setting salary too low

Paying yourself $20,000 when industry standard is $80,000 is a red flag. The IRS specifically looks for this.

Fix: Research comparable salaries and document your reasoning.

Mistake 3: Not running regular payroll

Some S-Corp owners pay themselves once per year. This creates problems:

• Uneven tax payments
• Potential IRS scrutiny
• Cash flow challenges

Fix: Run payroll at least quarterly, ideally monthly or bi-weekly.

Mistake 4: Mixing personal and business finances

S-Corps require clean separation between business and personal funds.

Fix: Use a dedicated business bank account. Never pay personal expenses directly from business accounts.

Mistake 5: Forgetting state compliance

Your LLC still needs to maintain state compliance even with S-Corp election.

Fix: File your Texas Franchise Tax report annually. Keep your registered agent current.

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The quick comparison

Here's how to think about it:

Just starting out, with modest or uneven profit? Stick with a standard LLC. The simplicity is worth more than any potential tax savings.

Established, with steady profit? Run the numbers on an S-Corp election. There's no single break-even number. It depends on your profit, the salary you can defend and what the S-Corp costs to run. At lower profit, payroll and the extra return can cost more than the payroll-tax difference. Try your numbers in the calculator, then talk it through with Krystal.

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Case study: DFW marketing agency

Sarah runs a digital marketing agency in Plano. Here's her S-Corp journey:

Year 1 (Standard LLC):

• Net profit: $45,000
• Self-employment tax: $6,885
• Kept simple, no S-Corp election

Year 2 (Standard LLC):

• Net profit: $78,000
• Self-employment tax: $11,934
• Started considering S-Corp

Year 3 (S-Corp Election):

• Net profit: $95,000
• Reasonable salary: $55,000
• Payroll taxes: $8,415
• Distribution: $40,000 (no SE tax)
• Savings vs. LLC: $5,115

Year 4 (S-Corp):

• Net profit: $140,000
• Reasonable salary: $70,000
• Payroll taxes: $10,710
• Distribution: $70,000 (no SE tax)
• Savings vs. LLC: $10,710

By waiting until her business was established, Sarah maximized her savings while avoiding unnecessary complexity in the early years.

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Take action: Your decision framework

Step 1: Calculate Your Net Profit

Review last year's Schedule C (or projected profit). Is it consistently above $60,000?

Step 2: Estimate Your Savings

Take your profit minus a reasonable salary. Multiply by 15.3%. That's your potential savings.

Step 3: Factor In Costs

Add up payroll processing, additional tax prep, and your time. Do savings exceed costs?

Step 4: Consider Timing

If it's before March 15, you can elect for the current year. Otherwise, plan for next year.

Step 5: Get Professional Guidance

S-Corp election is a significant decision. A CPA can run the numbers for your specific situation.

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The bottom line

Here's what I tell my clients: the difference between the right and wrong entity structure is real money—thousands per year that's either in your pocket or the IRS's.

Most business owners I meet made one of two mistakes:

• Elected S-Corp too early → wasted money on compliance they didn't need
• Waited too long → left tax savings on the table for years

If you're consistently making $60,000+ and haven't reviewed your structure, it's worth a conversation. I can run the numbers for your specific situation in about 15 minutes.

Questions? Reach out — I'm happy to talk through it.

— Krystal Le, CPA

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LeCPA helps small business owners across Plano, Richardson, Carrollton, Frisco, and Dallas with entity structuring and tax planning. Book a free strategy call →

Sources:

• IRS: S Corporations
• IRS: Self-Employment Tax (Social Security and Medicare Taxes)
• IRS: About Form 2553, Election by a Small Business Corporation