S-corp or LLC? How Florida owners should actually decide

No question reaches us more often than this one, and none is answered more confidently by people who have not seen the numbers. The honest answer is that it depends on six things, and that below a certain level of profit the S-election frequently costs more than it saves.

What the election actually does

First, a clarification that resolves a great deal of confusion: an LLC and an S corporation are not alternatives in the way people assume. An LLC is a legal structure created under state law. An S corporation is a federal tax election. An LLC can elect to be taxed as an S corporation and remain an LLC in every legal respect.

So the real question is not “LLC or S-corp?” It is: should my LLC (or corporation) elect S status for tax purposes?

Without the election, a single-member LLC's profit flows to Schedule C and the whole of it is subject to self-employment tax: 15.3% on the first tranche of earnings and 2.9% Medicare above that, plus the additional Medicare tax at higher incomes. With the election, the owner becomes an employee. Wages carry payroll tax; distributions of remaining profit do not.

The arithmetic, with real numbers

Consider a Florida consultancy with $200,000 of profit before the owner takes anything.

As a Schedule C sole proprietorship, essentially all $200,000 is subject to self-employment tax. After the deduction for half of it, the self-employment tax comes to roughly $23,000–$24,000.

As an S corporation paying the owner a defensible $110,000 salary, payroll taxes apply to the wages only, roughly $16,800 in combined employer and employee FICA. The remaining $90,000 is distributed free of payroll tax. The gross saving is around $6,000–$7,000.

From that gross saving you deduct the real costs: payroll processing, a separate Form 1120-S, higher preparation fees, and state registration. Realistically $2,500–$4,000 a year. The net benefit is therefore meaningful but not transformative, and it shrinks quickly as profit falls.

Run the same exercise at $90,000 of profit. Reasonable compensation might be $65,000, leaving $25,000 distributed. The payroll tax saved is roughly $3,800, against $2,500–$4,000 of additional cost. At that level the election is close to a wash, and it brings genuine administrative burden with it.

Reasonable compensation is the whole game

Every saving above depends on the wage figure being defensible, and this is where most S-corp problems originate.

There is no safe percentage, despite the “60/40 rule” that circulates online. The standard is what you would have to pay someone else to perform your role, assessed on duties, hours, experience, comparable market salaries and what the business can afford. An owner who is the sole revenue generator in a professional services firm cannot credibly pay themselves a quarter of the profit as salary.

S-corp owners taking large distributions on minimal wages is one of the most reliably examined positions in small business tax. When the IRS reclassifies distributions as wages, it assesses the payroll tax, penalties and interest, and it typically does so across every open year at once.

The factors that outrank payroll tax

Payroll tax is where the conversation starts and rarely where it should end. Four other factors regularly change the answer:

• The QBI deduction. Above the Section 199A income thresholds the deduction is limited by W-2 wages paid and by the basis of qualified property. Because the S-election changes your wage base, it can either preserve or destroy a 20% deduction, an effect that frequently exceeds the payroll tax saving in either direction.
• Losses. S-corp basis rules are stricter than partnership rules. Debt basis only arises from loans made directly by the shareholder, not from guaranteeing company borrowing. A business expecting losses may find them suspended in an S-corp where they would have been deductible in a partnership.
• Appreciating assets. Real estate inside an S corporation is difficult to distribute without triggering gain. Property generally belongs in an LLC taxed as a partnership.
• Exit. Buyers usually want to buy assets; sellers usually want to sell stock. Entity form determines what is available and at what cost. Section 1202 qualified small business stock, potentially the single largest exclusion available to a founder, requires C corporation status from issuance, which an S-election forecloses.

What Florida changes

Florida improves the picture in one specific way and leaves the rest unchanged. There is no Florida personal income tax, so pass-through income carries no state-level cost for a Florida-resident owner. That removes a variable that dominates the analysis in states with entity-level pass-through taxes or franchise taxes on LLCs.

Two caveats. Florida does impose corporate income tax on C corporations, so the C-corp branch of the analysis is not state-free. And if you have employees, property or sales elsewhere, those states apply their own rules regardless of where you sit.

A working rule of thumb

If profit after reasonable compensation is consistently below about $40,000, the S-election is usually not worth the administration. Between $40,000 and $80,000 it depends on the QBI position and how much complexity you are willing to carry. Above that it is generally worth modeling seriously.

But note the word modeling. The election has a 15 March deadline for the year in progress, and unwinding it later can trigger built-in gains tax and a five-year waiting period before you can re-elect. It is a decision worth an afternoon of arithmetic rather than an afternoon of opinions.