LLC vs S-Corp for Fractional Work: The $80K Break-Even Rule
If you've started taking fractional, advisory, or interim work and someone told you to "just set up an S-corp," they skipped the part that matters: an S-corp only pays off once your profit clears a certain line. Below it, you're paying for paperwork you don't need. Above it, you're leaving real money on the table by not electing.
First, clear up what an S-corp actually is
This trips up most people, so it's worth being precise. An LLC is a legal entity. An S-corp is a tax election. They are not two competing structures you pick between at the courthouse. In practice, most fractional executives form an LLC, and then separately decide whether to have that LLC taxed as an S-corp by filing IRS Form 2553.
So the real question behind "LLC vs S-corp for consultants" is: should my LLC keep its default tax treatment, or elect S-corp status? Same legal wrapper, different tax math.
Why the election saves money (and why it isn't free)
As a default LLC, all of your net profit is subject to self-employment tax — roughly 15.3% on top of income tax, covering Social Security and Medicare. On $150,000 of profit, that self-employment layer alone is meaningful.
With an S-corp election, you split your take into two buckets:
- A reasonable salary you pay yourself through payroll, which is subject to payroll taxes.
- Distributions — the remaining profit, which is not subject to self-employment or payroll tax.
That second bucket is where the savings live. But the election adds real cost and friction: you have to run actual payroll, file a separate business tax return (Form 1120-S), and most people pay a bookkeeper and a payroll service. Those costs typically run somewhere in the low-to-mid thousands per year. The election only makes sense once your tax savings comfortably exceed that overhead.
The reasonable-salary rule is the whole ballgame
The IRS requires that the salary you pay yourself be "reasonable" for the work you do. You can't pay yourself a $10,000 salary and take $140,000 in tax-free distributions — that's the exact abuse the rule exists to stop, and it's an audit flag.
For fractional and advisory work, a defensible salary usually lands at 40% to 60% of your total profit, depending on your role, your market rate, and how much of the income is genuinely your personal labor versus leverage. A fractional CFO billing $200,000 might set a salary around $90,000 to $110,000 and distribute the rest. The lower your reasonable salary (within defensible limits), the more profit escapes self-employment tax — but push it too low and you're inviting a problem.
The $80K break-even, in real numbers
Here's the rule of thumb that actually holds up: the S-corp election generally starts paying for itself somewhere around $80,000 to $120,000 in annual net profit. Below that, the savings rarely cover the added cost and hassle. The table below uses a 50% reasonable-salary split and is illustrative, not a precise quote — your numbers shift with your state, salary level, and provider fees.
| Net profit | Salary (50%) | Distribution | Rough SE-tax saved | Worth it? |
|---|---|---|---|---|
| $60,000 | $30,000 | $30,000 | ~$4,500 | Usually no |
| $90,000 | $45,000 | $45,000 | ~$6,800 | Borderline |
| $120,000 | $60,000 | $60,000 | ~$9,000 | Usually yes |
| $200,000 | $100,000 | $100,000 | ~$12,000+ | Yes |
The savings don't grow forever in a straight line, because the Social Security portion of the tax stops applying above an annual wage cap. Past that point, the distribution savings mostly cover the smaller Medicare slice. Still real money — just not unlimited.
The costs and hassles people forget
Before you file Form 2553, price in the full picture. An S-corp is not a fire-and-forget setup.
- Payroll has to actually run. Real paychecks, real withholding, real quarterly filings. Skipping payroll is one of the fastest ways to lose the election's protection.
- A separate tax return. The 1120-S is more involved than a Schedule C, and it's usually not a do-it-yourself job.
- Ongoing bookkeeping. You need clean books to defend the salary split and run payroll cleanly.
- State quirks. Some states levy franchise taxes, minimum fees, or extra filings on S-corps that can quietly eat your federal savings.
- Less flexibility. Distributions generally have to track ownership, which matters more if you ever bring on a partner.
A simple way to decide
If you're just testing fractional work or expect under roughly $80,000 in profit this year, stay a default LLC. It's clean, cheap, and you can always elect later. If you're consistently clearing $100,000 or more and the income is steady, the S-corp election usually nets you several thousand dollars a year after costs — worth the paperwork.
If you're sitting in the gray zone between, run your own numbers with a CPA before filing. The election has timing deadlines, and a one-hour conversation with someone who knows your state will pay for itself. Treat the $80K line as a prompt to do the math, not as a hard switch to flip on its own.
However you structure things, the entity is just the wrapper — your income depends on whether the right clients can find you and book you at your rate. That's what ExecRoster is for: you publish a profile, set your own terms, and get hired directly while keeping about 90% of what you earn. Get the structure right, then make sure there's enough work flowing through it to matter.