S-Corp vs LLC: When the Switch Pays in Colorado
An LLC and an S-Corp can be the exact same company on paper. The difference is how the IRS taxes your profit, and for many Colorado owners that difference is the single largest tax decision they will make.
The core difference in plain numbers
A single-member LLC pays self-employment tax, about 15.3 percent, on all net profit. An S-Corp pays that tax only on the salary you pay yourself. The remaining profit passes through as a distribution without self-employment tax.
Example: $150,000 profit. As an LLC, self-employment tax runs roughly $21,000. As an S-Corp paying a $70,000 reasonable salary, payroll tax runs roughly $10,700. The difference is about $10,000 a year, before the added cost of payroll and a separate return.
What the S-Corp costs you
- A separate corporate tax return (Form 1120-S) each year.
- Running real payroll for yourself, with W-2, withholding and quarterly filings.
- A reasonable salary. The IRS expects owners to pay themselves what the job would cost to hire out.
- Cleaner bookkeeping. Mixing personal and business money is a problem in any entity and a bigger one here.
When it usually makes sense
As a rule of thumb, once profit is consistently above $60,000 to $80,000 the savings exceed the added cost. Below that, the extra payroll and filing expense can eat the benefit. The answer depends on your numbers, which is why we run the comparison before recommending the election.
Colorado specifics
- Colorado recognizes the federal S-Corp election; no separate state election is needed.
- Colorado's flat income tax applies to pass-through profit either way.
- Payroll in Colorado means registering for state withholding, unemployment insurance and the FAMLI program.
Timing the election
Form 2553 is generally due within two months and 15 days of the start of the tax year you want it to apply to, though late elections are often accepted with reasonable cause. Planning the switch is part of year-round tax planning, and running the payroll correctly is covered under bookkeeping and payroll.
Common questions
Can I switch back?
Yes, but revoking the election has restrictions on re-electing, so it should be a deliberate decision.
Does the S-Corp protect me legally?
Liability protection comes from the LLC or corporation itself. The S-Corp election is purely a tax choice.
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