How Is an LLC Taxed in California?
A single-member LLC is taxed as a sole proprietorship by default — all net profit flows to your personal return (Schedule C) and is subject to self-employment tax (15.3% on the first $176,100 of net earnings, 2.9% above that). A multi-member LLC is taxed as a partnership by default. In both cases, California also imposes an $800 minimum franchise tax and a gross receipts fee ranging from $900 (on receipts over $250,000) to $11,790 (on receipts over $5 million).
What Is an S Corp and How Does It Save Taxes?
An S corporation is a tax election, not a separate entity type. An LLC or corporation can elect S corp status by filing Form 2553 with the IRS (and Form 3560 with California). The key tax benefit: as an S corp owner, you split your income into two components — a reasonable salary (subject to payroll taxes) and a distribution (not subject to payroll taxes). This split can save 15.3% in self-employment tax on the distribution portion.
LLC vs S Corp: Side-by-Side Comparison
| Factor | LLC (Default) | S Corp Election |
|---|---|---|
| Self-employment tax | 15.3% on all net profit | Only on salary portion |
| Payroll required? | No | Yes — must pay yourself a reasonable salary |
| California franchise tax | $800 minimum + gross receipts fee | 1.5% of net income (minimum $800) |
| Complexity | Simple | More complex — payroll, Form 1120-S, K-1s |
| Retirement plan options | SEP-IRA, Solo 401(k) | Solo 401(k) with higher contribution limits |
| Best for net profit | Under $40,000 | Over $60,000–$80,000 |
California-Specific Fees & Costs
California imposes additional costs that affect the LLC vs S corp decision. An LLC pays the $800 minimum franchise tax plus the gross receipts fee. An S corp pays 1.5% of California net income (minimum $800) — no gross receipts fee. For a business with $1 million in gross receipts but modest net income, the LLC gross receipts fee ($6,000) can exceed the S corp tax, making the S corp election advantageous even at lower net profit levels. KDA models the full California tax cost for both structures before recommending an election.
When to Switch from LLC to S Corp
The general rule: consider the S corp election when net profit consistently exceeds $60,000–$80,000 per year. Below that threshold, the payroll costs (payroll processing, employer payroll taxes, additional tax return complexity) often exceed the self-employment tax savings. Above $80,000, the savings are typically significant. KDA calculates the exact breakeven point for each client based on their specific income, salary, and California tax situation.
Case Study: $180K Net Profit
A California consultant earns $180,000 net profit as a single-member LLC. As an LLC, they pay $25,478 in self-employment tax. After electing S corp status and paying themselves a $90,000 salary, they pay $13,770 in payroll taxes on the salary — saving $11,708 per year. After accounting for payroll processing costs ($1,500/year) and additional tax preparation ($1,000/year), the net annual savings is approximately $9,200. Over 10 years, that is $92,000 in tax savings.
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