NJ LLC vs. S-Corp: Which Business Structure Saves You More in NJ Taxes?
- Gregory Monaco, CPA
- Dec 27, 2025
- 4 min read
The NJ LLC vs S-Corp decision determines how your business income is taxed and whether you can reduce self-employment taxes. An LLC taxed as a sole proprietorship pays self-employment tax on all profits, while an S-Corp allows you to split income between salary and distributions—potentially saving thousands in taxes annually.
Understanding the Basics: LLC vs. S-Corp
LLC (Limited Liability Company)
An LLC provides liability protection while offering flexibility in taxation. By default, a single-member LLC is taxed as a sole proprietorship, and all income is subject to self-employment tax (15.3% on the first $176,100 in 2025, 2.9% above that).
S-Corporation
An S-Corp is a tax election (not an entity type) that allows income to pass through to shareholders while offering self-employment tax savings. Shareholders who work in the business must take "reasonable compensation" as W-2 wages, but remaining profits distributed as dividends avoid self-employment tax.
LLC vs S-Corp Tax Comparison
Feature | LLC (Default) | S-Corp Election |
Self-employment tax | All profits subject to SE tax | Only salary subject to payroll tax |
Payroll requirement | None | Must run payroll for owner-employees |
Filing complexity | Schedule C (simple) | Form 1120-S + payroll returns |
BAIT eligible | Multi-member only | Yes |
NJ-Specific Requirements You Can't Ignore
New Jersey has unique requirements that differ from federal rules. Missing these can cost you significantly.
Separate NJ S-Corp Election Required
Federal S-Corp election (Form 2553) does not automatically apply to New Jersey. You must file NJ Form CBT-2553 separately, or NJ will treat your business as a C-Corporation—creating potential double taxation.
NJ Minimum Corporation Business Tax
S-Corps in NJ owe a minimum CBT regardless of income or losses.
NJ Minimum CBT for S-Corps
NJ Gross Receipts | Minimum Tax |
Under $100,000 | $375 |
$100,000 – $250,000 | $562.50 |
$250,000 – $500,000 | $750 |
$500,000 – $1,000,000 | $1,000 |
Over $1,000,000 | $2,000 |
Tax Savings Example: S-Corp Election
Scenario: Maria runs a marketing consultancy in Essex County with $120,000 net profit.
Option A: Single-Member LLC
Self-employment tax: ~$17,000
NJ income tax: ~$6,500
Total state + SE burden: ~$23,500
Filing: Simple (Schedule C, NJ-1040)
BAIT eligible: No
Option B: S-Corp Election
Reasonable salary: $75,000
Payroll taxes (combined): ~$11,475
Distribution: $45,000 (no SE tax)
NJ income tax: ~$6,500
NJ minimum CBT: $562.50
Payroll costs: ~$1,000
Total burden: ~$19,537
BAIT eligible: Yes
Annual savings with S-Corp: ~$4,000
When to Choose Each Structure
Stay as LLC If:
Net profit is under $50,000–$60,000 annually
You prefer simplicity over maximum tax savings
You're testing a new business idea
You want to avoid the cost and complexity of payroll
Elect S-Corp If:
Net profit exceeds $80,000 annually
You're willing to run payroll and file additional returns
You want to maximize SE tax savings
BAIT eligibility matters (for SALT cap workaround)
Consider Multi-Member LLC If:
You have business partners
You want BAIT eligibility without S-Corp complexity
You need flexible profit allocation
The "Reasonable Compensation" Requirement
S-Corp shareholders who work in the business must pay themselves a "reasonable salary" for services performed. The IRS scrutinizes salaries that appear too low relative to distributions.
Factors Determining Reasonable Compensation
Your role and responsibilities
Industry standards for similar positions
Company size and revenue
Geographic location (NJ salaries tend higher)
BAIT Eligibility Comparison
The NJ Pass-Through Business Alternative Income Tax (BAIT) provides a federal tax benefit by working around the $10,000 SALT cap.
BAIT Eligibility by Entity Type
Entity Type | BAIT Eligible |
Single-member LLC | No |
Multi-member LLC | Yes |
S-Corporation | Yes |
Partnership | Yes |
Common Mistakes to Avoid
Not filing NJ Form CBT-2553: Assuming federal election applies to NJ
Setting salary too low: Inviting IRS scrutiny on "reasonable compensation"
Ignoring NJ minimum tax: When calculating S-Corp benefits
Switching to S-Corp too early: When profits don't justify the complexity
Missing the election deadline: March 15 for calendar-year businesses
How Monaco CPA Helps
Monaco CPA helps Essex County and North Jersey business owners analyze LLC vs. S-Corp tax savings, prepare and file elections (Form 2553 federal + CBT-2553 NJ), set up compliant payroll, document reasonable compensation, and integrate BAIT planning into overall tax strategy.
Phone: (862) 320-9554
Email: greg@monacocpa.cpa
Gregory Monaco, CPA, MBA — Livingston, NJ | Serving Essex County and all of New Jersey
Frequently Asked Questions
Can I switch from LLC to S-Corp mid-year?
Yes, but timing matters. If you file Form 2553 within 75 days of the start of the year, the election is effective for the full year. Otherwise, it's effective for the following year unless you have reasonable cause for late filing.
Does S-Corp election change my liability protection?
No. If you're an LLC electing S-Corp tax treatment, you retain your LLC's liability protection. The S-Corp election is purely a tax classification.
What if I forget to file the NJ S-Corp election?
NJ treats you as a C-Corporation, which can create double taxation. You may be able to file a late election with reasonable cause explanation, but prevention is much easier than correction.
Is an S-Corp always better than an LLC?
No. For lower-income businesses, the added compliance costs outweigh the tax savings. And single-member LLC owners who don't need SE tax savings may prefer the simplicity of their current structure.
How do I know if my salary is "reasonable"?
Look at what similar positions pay in your industry and location. Industry surveys, job postings, and compensation databases help. A formal reasonable compensation study provides documentation if the IRS questions your arrangement.
Last updated: December 2025. Tax laws change frequently. Consult with a qualified CPA for advice specific to your situation.
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