LLC or S-Corp: How the Election Changes Your Self-Employment Tax in Texas

Every year I get some version of the same question from a Texas small business owner: should I make the S-Corp election? It usually comes up because a friend mentioned it, or a podcast made it sound like free money. The honest answer is that it depends entirely on your own numbers, and I would rather walk through the mechanism with you than give you a one-line answer that does not fit your situation.

What self-employment tax actually is

If you run your business as a sole proprietor or as a default LLC with no election, all of your net business profit is subject to self-employment tax, which covers Social Security and Medicare, on top of your regular income tax. That is true whether you take the money out of the business or leave it sitting in the account. The IRS treats the entire profit as earnings from your own labor.

What changes with an S-Corp election

An LLC can elect to be taxed as an S-Corp without changing its legal structure at all. Once the election is in place, you become an employee of your own business for the work you actually do, and you pay yourself a reasonable salary through payroll, with normal withholding. The profit left over after that salary is paid out as a distribution, and distributions are not subject to self-employment tax the way wages are.

Where the real savings comes from

The savings only shows up on the portion of profit paid as a distribution rather than salary, which means the election only helps once your business is profitable enough to support a reasonable salary and still have meaningful profit left over. A business with thin margins usually has nothing to gain from making this election, and may just add cost without benefit.

• Running payroll costs money and adds payroll tax filings.
• The salary has to be reasonable for the work performed, not artificially low.
• S-Corp status comes with its own tax return, separate from your personal return.
• The benefit grows with profit, so modest earnings may not cover the overhead.

Timing matters

Generally, the election needs to be made by a specific point early in the tax year for it to apply to that entire year. If you miss the window, you may be waiting until the following year. I would rather have this conversation in the winter or early spring than in the fall when the year is already mostly behind us.

If you have a Texas LLC and you are wondering whether the S-Corp election makes sense right now, I offer a free consultation to look at your actual numbers together. Call (210) 842-8197.