Mike Andes explains how LLC owners pay themselves through owner draws versus W-2 salaries. S-Corp election cuts self-employment tax by roughly 15% on distributions but costs more in admin and tax filing. Most owners should consider it once annual profit hits around $50,000.
Form 1120S
~15% self‑employment tax
About $50,000 in profit per year
A W‑2 (reasonable salary) as an owner
You wouldn't pay yourself as a W2 employee. As an owner, you would do draws instead.
You're an LLC now. As the business gets more profitable long term, you'll switch to an S Corp. And that's just one form. Form 1120s. You'll fill that out on your tax return and start taxing an S corp. Right now you're going to pay 15% self employment tax on any distributions you take as an LLC owner when you switch to S Corp. That those go away. But an S corp costs a lot more to maintain. It costs to do a tax return separate from your personal tax return. It's no longer just a schedule on your tax return. So you really want to be making more than $50,000 in profit each year before you switch from an LLC to an S Corp. But once you switch to an S corp, you have to take a W2 as an owner. As an owner. Okay, cool. Now it can be small because I don't want to pay as many taxes and then just take the rest of the distributions. That's fine, but for now you'd start the llc. You can take distributions. That's fine as an owner, but anyone else needs to get an OB2.
