Running a construction business means making strategic decisions—not just about materials and labor, but also about your business structure. If you’re operating as an LLC and wondering if it’s time to switch to an S Corp, you’re not alone.
With tax laws evolving and profit margins tightening, S Corporations are becoming the smarter choice for many contractors. In this guide, we’ll break down when it makes sense to make the switch, how much you could save, and what steps to take to do it right.
LLCs (Limited Liability Companies) have been a go-to for small business owners since they were introduced in the late 1970s. They became popular because they offered liability protection, meaning your personal assets are shielded if your business runs into legal or financial trouble.
They also have pass-through taxation, so you don’t get taxed twice like traditional corporations; instead, profits “pass through” to your personal tax return. On top of that, LLCs are simple to set up and maintain, with lower filing fees and fewer reporting requirements.
For contractors just starting out, these benefits make LLCs a solid choice. But as your business grows, sticking with an LLC could be costing you thousands in unnecessary taxes.
One major downside of LLCs is self-employment taxes. If you own a single-member LLC, the IRS treats all your business income as personal income. That means you’re on the hook for a 15.3% self-employment tax, covering Social Security and Medicare, and you pay it on your entire profit.
Let’s say your LLC makes $100,000 in profit. You’re paying $15,300 in self-employment tax before income tax even kicks in. That’s ON TOP of your federal and state taxes.
When you’re self-employed, the IRS sees you as both the employee and the employer. That means you have to pay both sides of Social Security and Medicare taxes, making it hard to keep more of what you earn.
Switching to an S Corporation changes how your income is taxed—and that’s where the real benefits start.
With an S Corp, you split your income into two categories.
The first is salary, where the IRS requires you to pay yourself a “reasonable salary” and withhold payroll taxes. The second is distributions, which are profits not subject to self-employment tax.
Let’s break it down with real numbers.
If you make $100,000 in profit under an S Corp, you might take a $30,000 salary and $70,000 in distributions. You only pay employment taxes on the $30,000 salary—not the full amount. That means you avoid 15.3% tax on $70,000, saving you about $10,700.
That’s money that can go toward growing your business, investing in better equipment, or simply paying yourself more.
Before you rush to make the switch, there are some important rules you need to know about S Corps.
A good rule of thumb is to take at least 30-40% of your profit as salary to stay compliant.
So, when does it make sense to move from an LLC to an S Corp?
If your annual profit is $50,000 or more, then switching to an S Corp is worth considering.
Below this threshold, the tax savings don’t usually outweigh the additional costs of running payroll and filing extra forms. If you’re paying too much in self-employment taxes, you should do the math.
If an S Corp can save you $8,000 or more in taxes per year, it’s worth making the change. If you’re ready to scale your business, an S Corp makes it easier to pay yourself strategically while keeping your business finances in check.
If you decide to switch, you need to file IRS Form 2553 before March 15, 2025, to have it apply for the full tax year.
While S Corps are great for many contractors, there are some situations where staying an LLC makes sense.
If you’re making under $50,000 in profit, the tax savings won’t justify the extra administrative work. If you’re in real estate investing, LLCs are better for holding rental properties due to how passive income is taxed. If you’re just starting out, new business owners who are still figuring out their finances should stick with a simpler structure at first.
If you’re ready to make the switch, here’s how to do it.
First, file Form 2553 with the IRS before March 15 to apply for S Corp status in 2026.
Then, set up payroll using Gusto, QuickBooks Payroll, or a CPA. Next, adjust your bookkeeping to track salary versus distributions properly. After that, start paying yourself a reasonable salary, usually at least 30% of your profit. Finally, stay on top of quarterly payroll taxes and annual reporting.
If this sounds overwhelming, get professional help. A tax strategist or bookkeeping expert can make sure you’re doing it right and maximizing savings.
LLCs are great for protection and simplicity, but once your business is pulling in consistent profit, sticking with an LLC means losing money to taxes unnecessarily.
For contractors making $50,000 or more in profit, switching to an S Corp can be one of the best financial moves you make. It’s not just about saving on taxes—it’s about setting your business up for long-term success.
Let’s talk. I help contractors structure their businesses for maximum tax savings and efficiency. Scroll down to book a call to see if an S Corp is right for you.
Your business should work for you—not just the IRS. Let’s make this year your most profitable year yet!
