S-Corp vs LLC: Are You Paying More Taxes Than You Need To?
If you own an LLC in Oregon or Idaho—or you're forming one—you’ve probably heard of the S-Corp election. Maybe someone told you it’s a smart tax move. Maybe a CPA mentioned you're “leaving money on the table.” Or maybe you’re just confused by what it even is.
Let’s clear that up.
First, What Is an S-Corp—Really?
Despite the name, an S-Corporation isn’t a business entity. It’s a tax status under Subchapter S of the Internal Revenue Code. You don’t “form” an S-Corp—you form an LLC or corporation, and then elect to be taxed as an S-Corp.
This is where confusion starts: structure and tax treatment are separate layers. You can have an LLC taxed as an S-Corp, a corporation taxed as an S-Corp, or stick with default taxation.
How Business Taxation Works by Default
Here’s how the IRS treats different entities by default:
Single-member LLC: taxed as a sole proprietorship
Multi-member LLC: taxed as a partnership
Corporation: taxed as a C-Corp
But in each case, you can choose to be taxed as an S-Corp—if you qualify.
Why Make the Switch?
The core appeal of the S-Corp is saving on self-employment taxes.
Sole proprietors (and default LLCs) pay self-employment tax—15.3% for Social Security and Medicare—on all net business income.
But S-Corp owners split income into:
Salary (subject to payroll taxes)
Profit distributions (not subject to payroll taxes)
This structure can reduce overall tax liability—if implemented correctly.
A Simple Example
Say you run an LLC-based business in Idaho and net $120,000 in profit annually.
As a default LLC: you pay self-employment tax on the full $120,000 (~$18,000).
As an S-Corp: you pay yourself a “reasonable salary”—let’s say $70,000—and the rest ($50,000) is a distribution not subject to payroll tax. That saves you roughly $7,500 in taxes.
Sounds great. But there are important catches.
The Trade-Offs: Complexity and Compliance
1. “Reasonable Compensation” Is a Gray Area
You must pay yourself a salary that reflects market value. Underpaying to maximize untaxed distributions will get the IRS’s attention.
2. You Must Run Payroll
That means W-2s, quarterly tax filings, and payroll tax compliance. Most owners use a service (like Gusto or QuickBooks), which adds cost.
3. You File a Separate Tax Return
An S-Corp files Form 1120S and issues K-1s to shareholders. More forms, more deadlines, and more bookkeeping precision.
4. You Must Qualify
S-Corps are limited to 100 shareholders, all of whom must be U.S. citizens or residents. You can’t have multiple classes of stock.
When the S-Corp Election Makes Sense
Here’s how I walk through it with Oregon and Idaho clients:
Under $40K net income: Probably not worth it. The tax savings won’t justify the complexity.
$60K–$150K net income: Maybe. Run the numbers. If you’re actively working in the business and ready to handle payroll and filings, it can save you thousands.
Over $150K net income: Likely worth it—especially if your ownership structure is simple. Just be sure your books, salary, and compliance are clean.
Watch the Deadline
To have your S-Corp election take effect for the current tax year, you must file IRS Form 2553 within 2 months and 15 days of the start of the tax year (or after forming the business). You can request late election relief, but it’s not guaranteed.
What About Oregon and Idaho State Taxes?
Oregon honors the federal S-Corp election, but be aware of the Corporate Activity Tax (CAT) on gross receipts over $1 million. It applies regardless of entity type.
Idaho also honors the S-Corp election and requires a state tax return and withholdings for nonresident shareholders.
Real-World Example
A Portland-based design firm formed an LLC but kept default taxation. After two years of earning over $200,000 annually, they switched to S-Corp status and saved roughly $12,000 in self-employment taxes. But it required:
Backpaying reasonable salary
Setting up payroll
Cleaning up their books
Hiring a CPA for ongoing support
It was worth it—but only after doing the groundwork.
Final Takeaway
The S-Corp is not a magic switch. It’s a useful tax tool, but only in the right context. If your income is stable, you’re actively involved in the business, and you’re ready to run payroll—or pay someone to—you might benefit.
But if you’re still growing, hate paperwork, or run a part-time venture, sticking with default LLC taxation is often simpler and safer.
At Track Town Law, I help small business owners across Oregon and Idaho make informed decisions—not just about formation, but how their legal and tax choices fit together. Business services are billed hourly, and everything we do is tailored to your business—not someone else’s spreadsheet.
Book a consultation if you’re ready to evaluate whether the S-Corp election fits your goals and growth plan.
This post is based on Episode 6 of the Doing Business As podcast. If you prefer to listen—or want to share this with a colleague or CPA—you’ll find the full episode wherever you get your podcasts, or right here in the Track Town Law Learning Center linked above.
Next Up:
Buy-sell agreements—what they are, why they matter, and how to avoid turning your business into a courtroom drama when a partner exits, dies, or decides to cash out.
