Does switching from an LLC to an S-Corp save money in Texas where there's no state income tax?
Yes, it can save money, but the savings have nothing to do with state income tax. The S-Corp advantage is entirely a federal self-employment tax strategy, so it works in Texas the same way it works in every other state.
When you operate as a single-member LLC, all of your net profit is subject to self-employment tax at 15.3%. That covers Social Security at 12.4% and Medicare at 2.9%. If your business nets $120,000, you’re paying roughly $17,000 in self-employment tax on top of your regular federal income tax.
With an S-Corp election, you pay yourself a reasonable salary and take the rest as distributions. Only the salary portion gets hit with payroll taxes. If that same $120,000 business pays you a reasonable salary of $60,000, payroll taxes apply to the salary only. The remaining $60,000 comes to you as a distribution with no self-employment or payroll tax attached. That’s roughly $9,000 in annual savings.
The phrase “reasonable salary” is where the IRS pays close attention. S-Corp owners who work in the business must pay themselves what someone in that role would actually earn. You cannot pay yourself $20,000 and take $100,000 in distributions. If the IRS reclassifies those distributions as wages, you’ll owe back payroll taxes plus penalties and interest.
On the Texas-specific side, the picture is neutral. There’s no state income tax benefit to gain or lose from the election. Texas does have the franchise tax, sometimes called the margin tax, which applies to both LLCs and S-Corps with revenue above $2.47 million. Your entity type doesn’t change that obligation.
The additional costs of running an S-Corp factor into the math. You’ll need to process payroll, either through software or a service. You’ll file a separate business tax return (Form 1120-S) each year in addition to your personal return, which means higher preparation fees. You may also want professional guidance on setting the right salary amount.
S-Corp election generally starts paying for itself when your business nets around $50,000 to $60,000 or more in profit after your reasonable salary. Below that threshold, the payroll tax savings usually don’t outweigh the added costs and administrative burden.
Before making the switch, run the actual numbers for your situation. A Houston fractional CFO can model the self-employment tax savings against the new costs and tell you whether the election makes sense right now or whether you should wait until profits reach the right level. The election itself is straightforward through IRS Form 2553, but the decision behind it should come from real projections rather than general rules of thumb.
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