I wrote a two-way comparison of LLC vs. S-Corp that covers the basics. This post goes deeper with a three-way comparison that includes sole proprietorships, and I'm going to show you the actual math at four different income levels so you can see exactly where the breakpoints fall.
Quick Overview of the Three Structures
Sole Proprietorship: The default. You start doing business and report income on Schedule C. No state filing required beyond a business registration. No liability protection. All net income is subject to federal self-employment (SE) tax at 15.3%.
LLC (Single-Member): A state-level structure that provides liability protection. You file formation documents with NJ ($125 filing fee) and pay an annual report fee ($75). For tax purposes, a single-member LLC is identical to a sole proprietorship. Same Schedule C, same SE tax. The LLC adds legal protection, not tax savings.
S-Corp (LLC with S-Corp Election): You form an LLC in NJ, then file IRS Form 2553 to elect S-Corp taxation. This lets you split income between a W-2 salary (subject to payroll taxes) and distributions (not subject to payroll taxes). The trade-off is higher compliance costs: payroll processing, a separate S-Corp tax return (Form 1120-S and NJ CBT-100S), and NJ's $500 minimum corporate business tax.
The Math at Four Income Levels
These calculations use 2026 tax rates and thresholds. They assume a single filer with no other income, taking the standard deduction. Real results vary based on your complete tax picture, but these numbers illustrate the relative cost of each structure.
At $50,000 Net Profit
Sole Prop / LLC (default):
- SE tax: ~$7,065 (15.3% on 92.35% of net income)
- Federal income tax: ~$4,200 (22% bracket, after SE deduction and standard deduction)
- NJ GIT: ~$1,400
- Compliance cost: $0 for sole prop, ~$200 for LLC (formation + annual report)
- Total tax burden: ~$12,665
S-Corp (salary $40,000 / distribution $10,000):
- Payroll tax (employer + employee FICA on $40K salary): ~$6,120
- Federal income tax: ~$4,200 (similar bracket, salary replaces SE income)
- NJ GIT: ~$1,400
- NJ minimum CBT: $500
- Compliance costs (payroll processing, 1120-S, CBT-100S): ~$3,500
- Total tax + compliance: ~$15,720
The verdict at $50K: S-Corp saves roughly $945 in payroll taxes compared to SE tax, but compliance costs add $3,500+. That's a net loss of about $2,555. An LLC without S-Corp election is the right call. You get liability protection without the overhead.
At $100,000 Net Profit
Sole Prop / LLC (default):
- SE tax: ~$14,130
- Federal income tax: ~$12,400
- NJ GIT: ~$3,400
- Total tax burden: ~$29,930
S-Corp (salary $60,000 / distribution $40,000):
- Payroll tax on $60K salary: ~$9,180
- Federal income tax: ~$12,400
- NJ GIT: ~$3,400
- NJ minimum CBT: $500
- Compliance costs: ~$3,500
- Total tax + compliance: ~$28,980
The verdict at $100K: S-Corp saves ~$4,950 in payroll taxes vs. SE tax. After $3,500 in compliance costs, the net savings are about $1,450. That's real money, but it's marginal. If your income fluctuates and you might dip below $100K some years, the savings may not justify the added complexity.
At $150,000 Net Profit
Sole Prop / LLC (default):
- SE tax: ~$21,200
- Federal income tax: ~$24,000
- NJ GIT: ~$6,700
- Total tax burden: ~$51,900
S-Corp (salary $75,000 / distribution $75,000):
- Payroll tax on $75K salary: ~$11,475
- Federal income tax: ~$24,000
- NJ GIT: ~$6,700
- NJ minimum CBT: $500
- Compliance costs: ~$3,500
- Total tax + compliance: ~$46,175
The verdict at $150K: S-Corp saves ~$9,725 in payroll taxes. After compliance costs, the net savings are about $6,225 per year. This is a clear win. At this income level, the S-Corp election pays for itself several times over. Use the S-Corp Savings Calculator to run your own numbers.
At $250,000 Net Profit
Sole Prop / LLC (default):
- SE tax: ~$30,600 (Social Security caps at $184,500 for 2026, so you stop paying the 12.4% above that. Medicare at 2.9% continues on all earnings, plus 0.9% Additional Medicare above $200K.)
- Federal income tax: ~$46,000
- NJ GIT: ~$14,500
- Total tax burden: ~$91,100
S-Corp (salary $100,000 / distribution $150,000):
- Payroll tax on $100K salary: ~$15,300
- Federal income tax: ~$46,000
- NJ GIT: ~$14,500
- NJ minimum CBT: $500
- Compliance costs: ~$4,000 (slightly higher for the larger filing)
- Total tax + compliance: ~$80,300
The verdict at $250K: S-Corp saves ~$15,300 in payroll taxes. After compliance costs, the net savings are about $11,300 per year. At this level, you should absolutely be operating as an S-Corp. The savings are too significant to leave on the table.
Beyond the Tax Math
Liability Protection
A sole proprietorship offers zero liability protection. Your personal assets (house, savings, car) are exposed to business debts and lawsuits. Both LLCs and S-Corps provide a liability shield between your business and personal assets. For any business with real risk, operating as a sole prop is hard to justify even at low income levels.
Formation Process
NJ LLC: File a Certificate of Formation with the NJ Division of Revenue ($125). Get an EIN from the IRS (free, takes 5 minutes online). Open a business bank account. Total time: a few days.
S-Corp Election: Form the LLC first, then file IRS Form 2553 within 75 days of the start of your tax year (or the year-round late election relief under Rev. Proc. 2013-30). Set up payroll. File the NJ CBT-100S to ensure NJ recognizes the election.
NJ-Specific Costs and Considerations
- NJ LLC annual report: $75/year.
- NJ minimum CBT: $500/year for S-Corps, regardless of income.
- NJ BAIT election: Available to LLCs (taxed as partnerships or S-Corps) to bypass the federal $10,000 SALT cap. Sole props cannot use BAIT.
- NJ payroll taxes: S-Corp owner-employees pay into NJ SUI, SDI, FLI, and workforce development. These are additional costs beyond federal FICA.
When to Convert
Sole prop to LLC: Do this immediately if you haven't already. The liability protection alone is worth the $125 filing fee. There's no tax cost to making this change.
LLC to S-Corp: When your net business income consistently exceeds $80,000 to $100,000 per year and you expect it to stay there. Don't elect S-Corp for one good year. The compliance costs are ongoing.
S-Corp back to LLC (default): Rare, but it happens. If your income drops significantly and stays low, the compliance costs of S-Corp may no longer be justified. Revoking an S-Corp election requires consent from shareholders holding more than 50% of shares.
Summary Table
| Income Level | Sole Prop / LLC Tax | S-Corp Tax + Compliance | Net S-Corp Savings | Recommendation |
|---|---|---|---|---|
| $50K | ~$12,665 | ~$15,720 | -$2,555 (loss) | LLC without S-Corp |
| $100K | ~$29,930 | ~$28,980 | ~$1,450 | Marginal, depends on stability |
| $150K | ~$51,900 | ~$46,175 | ~$6,225 | S-Corp, clear win |
| $250K | ~$91,100 | ~$80,300 | ~$11,300 | S-Corp, strong win |
Next Steps
Run your own numbers with the S-Corp Savings Calculator. If you're ready to form an LLC or elect S-Corp status, check out my business formation services. And for the two-way deep dive on LLC vs. S-Corp specifically, read the LLC vs. S-Corp comparison.
Legal Framework and Election Details
Under Treas. Reg. Section 301.7701-3, a single-member LLC is a 'disregarded entity' for federal tax purposes, meaning it files on Schedule C just like a sole proprietorship. Multi-member LLCs default to partnership taxation (Form 1065). Neither designation changes until you affirmatively elect otherwise. The S-Corp election (Form 2553) must be filed by March 15 of the tax year it takes effect, but Rev. Proc. 2013-30 provides late election relief if you can show reasonable cause and file within 3 years and 75 days of the intended effective date.
New Jersey automatically recognizes a federal S-Corp election under P.L. 2022, c.133, so you no longer need to file a separate NJ election form. However, the NJ S-Corp still files a CBT-100S return and pays the $500 minimum Corporate Business Tax. If you formed your LLC and elected S-Corp status mid-year, NJ prorates the minimum tax based on the number of months the entity existed during the tax year.
For entity conversion costs, expect to pay roughly $125 for the NJ Certificate of Formation (LLC), $0 for the federal EIN, and $1,500 to $3,000 in professional fees for the S-Corp election, initial payroll setup, and first-year compliance. Annual ongoing costs for an S-Corp typically run $2,000 to $5,000 depending on payroll frequency and the complexity of your return. These costs should be weighed against the payroll tax savings shown in the tables above.
This article is for informational purposes only and does not constitute tax advice. Tax outcomes depend on your specific facts and circumstances.
