LLC vs S-Corp in Texas: Which Saves Tax?

The short version

• An LLC is a legal structure; an S-corp is a tax election — an LLC can choose to be taxed as an S-corp.
• A default LLC pays 15.3% self-employment tax on all net profit.
• An S-corp splits pay into a reasonable salary (payroll taxes apply) and distributions (no self-employment tax) — that split is where the savings come from.
• The savings only beat the added cost once profit is consistently high (often around $40,000–$80,000+ in net profit).
• Texas franchise tax can apply to either one; the S-corp election doesn't dodge it.

How each is taxed

As a standard single-member LLC, all your profit flows to your personal return and gets hit with self-employment tax (15.3%) plus income tax. Simple, but that SE tax adds up.

Elect S-corp status and you become an employee of your own business. You pay yourself a salary — subject to payroll taxes — and take remaining profit as distributions, which aren't subject to self-employment tax. On, say, $120,000 of profit, shifting a chunk from "all salary" to "salary + distribution" can save real money.

When the election pays off

The catch is the IRS requires a reasonable salary — roughly what you'd pay someone else to do your job. Pay yourself an artificially low salary to dodge tax and you invite reclassification and penalties.

You also take on costs: running payroll, filing a separate business return (Form 1120-S), and usually more bookkeeping. Those costs are fairly fixed, so they eat up the savings on lower profits and only make sense once profit is high and steady.

The Texas angle

Because Texas has no personal income tax, this comparison is really about federal self-employment tax — there's no state income bracket to factor in, unlike many other states.

But don't forget the franchise (margin) tax: Texas levies it on businesses above a revenue threshold (a bit under $2.5 million in recent years; the figure is adjusted periodically). Both an LLC and an S-corp are subject to it, so electing S-corp status doesn't get you out of it.

Bottom line

If your net profit is modest, a plain LLC is often simpler and cheaper. Once profit is consistently high enough that the SE-tax savings clearly outrun payroll and filing costs, the S-corp election is worth pricing out with a tax advisor — ideally before the tax year, since the election has timing rules.