LLC vs S-Corp for Your Construction Business: How to Choose

"Should I become an S-Corp?" is the question contractors with 2-3 years on their LLC ask me most. The right answer isn't "yes" or "no" — it depends on your net annual income and how disciplined you are with payroll.

In this article I'll explain the real difference, where the break-even point is, and the common mistakes that end up costing more in taxes than the actual tax savings.

First, the basics

LLC (Limited Liability Company) is a legal structure. It separates you personally from the business (limits your liability). By default, for tax purposes, an LLC is treated as:

• Single-member LLC → Schedule C on your personal 1040 (same as sole proprietor).
• Multi-member LLC → Form 1065 (partnership).

S-Corp is a tax classification, not a legal entity. You elect to file as an S-Corp by submitting Form 2553 to the IRS. An LLC can elect S-Corp taxation without changing its legal entity.

In other words: you're not choosing between two different things. You're choosing between LLC taxed as sole prop/partnership vs LLC taxed as S-Corp.

The difference that matters: Self-Employment Tax

As a Schedule C filer, all your net profit pays Self-Employment Tax at 15.3% (Social Security + Medicare). That's in addition to federal and state income tax.

As an S-Corp, you split income into two parts:

1. "Reasonable salary" — a W-2 you pay yourself. Pays 15.3% combined (half from the company, half from you).
2. "Distributions" — the rest of the profit. Pays no Self-Employment Tax.

That's the magic. The rest only pays normal income tax.

A worked example

Let's say your business netted $120,000 after all annual expenses.

As Schedule C (regular LLC)

• Net profit: $120,000
• Self-Employment Tax: $120,000 × 15.3% × 0.9235 = $16,955
• Plus federal income tax (depending on bracket).

As S-Corp

• Reasonable W-2 salary: $60,000 (half — this is a scenario; depends on role and market).
• Distributions: $60,000.
• Payroll taxes on the $60K: $60,000 × 15.3% = $9,180.
• Distributions: 0% SE Tax.
• Plus federal income tax on the $120K combined.

Estimated savings vs Schedule C: ~$7,700 per year.

But careful: those savings aren't free. There are costs.

What an S-Corp actually costs (that people don't calculate)

1. Payroll service: Gusto, ADP, QuickBooks Payroll — $50-80/month = $600-960/year.
2. Separate tax return: Form 1120S + K-1s. $800-1,500/year with a preparer.
3. State franchise taxes: some states (CA, NY, TX) charge annual fees on top.
4. More bookkeeping because you have to separate payroll, distributions, retirement contributions.
5. Unemployment insurance on your own W-2.
6. Higher IRS audit risk on S-Corps if your salary is unreasonably low vs distributions.

Estimated extra annual cost of operating as S-Corp: $1,800 - $3,500.

The break-even point (rule of thumb)

Annual net profit	General recommendation
< $40,000	Schedule C — savings don't justify costs
$40K – $60K	Borderline; depends on state and discipline
$60K – $100K	S-Corp probably worth it
> $100K	S-Corp almost certainly worth it

These are general ranges. Your situation may vary.

Mistakes that destroy the benefit

1. Unreasonably low salary

If you pay yourself $10,000 in salary and take $110,000 in distributions, the IRS will reclassify it and you'll owe all back taxes + penalties + interest. The rule is "reasonable compensation" — based on what you'd pay an outside employee doing the same job.

For a solo contractor (no employees) in Virginia, a reasonable salary is typically $40K-$70K depending on role and volume.

2. Not running actual payroll

You have to issue yourself a W-2, withhold federal/state/FICA, file quarterly 941, annual 940, annual W-3/W-2. It's not "I transfer money from the business account to my personal account." It's formal payroll.

3. Mixing personal expenses with the S-Corp

As an S-Corp, you're an employee of your own company. If you pay personal expenses from the business account, it's "piercing the corporate veil" and you lose liability protection.

4. Not taking advantage of Solo 401(k) or SEP IRA

One of the big advantages people don't use: as an S-Corp owner with a salary, you can:

• Contribute to a Solo 401(k): up to $23K as employee + company match.
• Or SEP IRA: up to 25% of salary.

This reduces taxable income and builds retirement at the same time.

What if you're just starting?

If your business is new, just billing $30K-$50K net per year, start as a regular LLC (Schedule C or partnership). When it grows and you consistently project >$60K net, consider the S-Corp election.

Don't rush into S-Corp just because "everyone does it." If you can't run monthly payroll, it'll cost you more.

When to make the switch

Good time to consider switching:

• Your Schedule C netted >$60K this year.
• You project the same or more next year.
• You can run monthly payroll (with a service or with a bookkeeper handling it).
• You're willing to file a separate Form 1120S.

How it's done: Form 2553 to the IRS, ideally by March 15 of the year it applies (or within the first 75 days of the new tax year). There's a late election in some cases.

What if I'm already S-Corp but it no longer fits?

If your volume dropped and the S-Corp no longer pays for itself, you can revoke the election — but there are rules (you typically can't re-elect for 5 years after revoking). Talk to your preparer before doing it.

Summary

• LLC taxed as Schedule C/Partnership: simple, cheap, good for profits < $60K.
• LLC taxed as S-Corp: more paperwork, more cost, but saves Self-Employment Tax on distributions.
• Break-even: ~$60K net annual profit.
• Salary must be reasonable or the IRS reclassifies everything.
• Don't switch because of trend — switch when the numbers justify it.

If you'd like to look at your specific situation and project how much you'd save (or not) with an S-Corp election in your case, get in touch. The first consultation is free.