S-Corp vs LLC in Texas: Which Saves You More?

If you run a business in Texas, you have probably heard that switching from an LLC to an S-Corp can save you thousands in taxes. That is true for many business owners, but it is not the right move for everyone. Here is how to figure out which entity structure puts more money in your pocket.

How LLCs Are Taxed by Default

A single-member LLC is treated as a "disregarded entity" by the IRS. That means all of your business income flows through to your personal tax return on Schedule C. You pay income tax on it, plus self-employment tax (Social Security and Medicare) on the full amount.

For 2026, the self-employment tax rate is 15.3% on the first $168,600 of net earnings (12.4% Social Security + 2.9% Medicare), plus an additional 0.9% Medicare surtax on earnings above $200,000 for single filers.

Example: You earn $150,000 in net business income as an LLC. Your self-employment tax alone is roughly $21,194. That is before you even get to income tax.

Multi-member LLCs are taxed as partnerships by default, but each member still pays self-employment tax on their share of the income in a similar way.

How S-Corp Taxation Works

An S-Corp is not a separate business entity. It is a tax election. You can keep your LLC and simply file Form 2553 with the IRS to elect S-Corp tax treatment.

The key difference: as an S-Corp, you split your business income into two buckets.

1. Salary (W-2 wages): You pay yourself a "reasonable salary" as an employee of the business. This portion is subject to payroll taxes (the employer and employee shares of Social Security and Medicare).

2. Distributions: Everything above your salary can be taken as a distribution. Distributions are subject to income tax but NOT self-employment tax.

Example: Same $150,000 in net business income. You pay yourself a reasonable salary of $70,000. The remaining $80,000 comes out as a distribution. You only pay payroll taxes on the $70,000 salary, not the full $150,000. That saves you roughly $12,240 in self-employment tax.

The "Reasonable Salary" Requirement

The IRS requires that S-Corp owners who work in the business pay themselves a reasonable salary before taking distributions. You cannot pay yourself $10,000 and take $140,000 in distributions. The IRS will scrutinize that.

What counts as reasonable depends on your industry, experience, location, and comparable salaries for similar roles. In the Dallas-Fort Worth area, this is typically 40-60% of net business income for most professional services, though it varies.

Getting the salary number right is critical. Too low and you invite an IRS audit. Too high and you lose the tax benefit of the S-Corp election entirely.

Texas-Specific Considerations

Texas adds a few wrinkles that make this decision different from other states.

No State Income Tax

Texas has no personal income tax, so you do not need to worry about state-level differences in how LLCs and S-Corps are taxed on income. This actually makes the S-Corp election slightly more straightforward here than in states with income tax, because you are only optimizing for federal taxes and self-employment taxes.

Texas Franchise Tax

Both LLCs and S-Corps are subject to the Texas franchise tax (also called the "margin tax"). The rate is 0.375% for retail and wholesale businesses, or 0.75% for all other businesses.

However, businesses with total revenue under $2.47 million (2026 threshold) owe no franchise tax, and businesses with revenue under $20 million can use the EZ Computation rate of 0.331%.

For most small businesses, the franchise tax treatment is essentially the same whether you are an LLC or S-Corp, so it should not be the deciding factor.

Filing Requirements

An S-Corp requires more paperwork. You will need to:

• Run payroll (including quarterly payroll tax filings)
• File Form 1120-S (the S-Corp tax return) annually
• Issue yourself a W-2
• Issue K-1s to all shareholders
• Maintain corporate formalities

An LLC taxed as a sole proprietorship only requires a Schedule C on your personal return. The added compliance cost of an S-Corp is typically $2,000 to $5,000 per year in additional accounting fees.

When the S-Corp Election Makes Sense

The S-Corp election generally saves you money when:

• Net business income exceeds $50,000-$60,000. Below this threshold, the payroll tax savings often do not outweigh the added compliance costs.
• You are a service-based business with high profit margins and relatively low overhead.
• Your business is stable. If your income fluctuates wildly year to year, managing the reasonable salary requirement gets complicated.
• You plan to stay in business for several years. The setup and ongoing costs need time to pay off.

When to Stay as an LLC

Keep your LLC as-is (without the S-Corp election) when:

• Net income is below $50,000. The compliance costs eat into the savings.
• You are reinvesting most profits back into the business. If you need cash in the business for growth, the S-Corp structure adds unnecessary complexity.
• You have significant losses. LLC losses flow through more simply to offset other income.
• You are in the early stages and your income is unpredictable.

The Numbers: A Real Comparison

Here is a side-by-side comparison for a Texas business owner earning $120,000 net:

| | LLC (Schedule C) | S-Corp (salary $65,000) | |---|---|---| | Self-employment tax | ~$16,956 | ~$9,945 (payroll tax on salary) | | Additional accounting costs | $0 | ~$3,000 | | Net tax savings | — | ~$4,011 |

At $200,000 net income with a $90,000 salary:

| | LLC (Schedule C) | S-Corp (salary $90,000) | |---|---|---| | Self-employment tax | ~$25,678 | ~$13,770 (payroll tax on salary) | | Additional accounting costs | $0 | ~$3,500 | | Net tax savings | — | ~$8,408 |

The higher your income, the more the S-Corp election saves you, because a larger portion of your income escapes self-employment tax.

How to Make the Election

If you decide the S-Corp election is right for you:

1. File Form 2553 with the IRS. You can file by March 15 of the tax year you want the election to take effect, or within 75 days of forming your LLC.
2. Set up payroll. You will need a payroll provider to handle withholdings and quarterly filings.
3. Open a business bank account if you do not already have one. S-Corps require clean separation of business and personal finances.
4. Work with a tax professional to determine your reasonable salary and ensure compliance.

The Bottom Line

For Texas business owners earning above $60,000 in net profit, the S-Corp election almost always saves money on taxes. The question is how much, and whether the added complexity is worth it for your specific situation.

The best approach is to run the numbers for your actual business. Every situation is different, and a few thousand dollars in tax savings can compound significantly over the years.

Want to see exactly how much you could save? Try our free savings estimator to get a personalized breakdown for your business.