In the LLC vs S corp decision, most Amazon and Shopify sellers end up with both: an LLC for legal protection, taxed as an S corporation once steady net profit sits well above a reasonable owner salary. The LLC is the legal entity you form with your state. The S corp election is a federal tax setting you can add to that same LLC. So the useful question is when the election starts saving more than it costs.
That answer comes down to self-employment tax. In a default-taxed LLC, the owners pay 15.3% self-employment tax on most of the profit. An S corp pays that rate only on the owner’s W-2 salary, and the rest of the profit comes out as distributions free of Social Security and Medicare tax. For a seller netting $50,000, the gap is usually swallowed by payroll and filing costs. At $150,000 it can be several thousand dollars a year, even after those costs.
The LLC Protects You, and the Election Only Changes the Tax Bill
Your liability protection comes from the LLC and stays exactly the same after an election. If a customer files a product claim or a supplier sues, the LLC separates those claims from your personal assets whether the IRS taxes you as a sole proprietor, a partnership or an S corp. Your state registration, EIN, Seller Central account and bank accounts all carry over.
What changes is the federal side: you become an employee of your own company, you run payroll, and the business files Form 1120-S instead of Schedule C or Form 1065. If you are still selling as a sole proprietor, start with whether you need an LLC to sell on Amazon, because the entity decision comes before the tax one.
Where the S Corp Savings Come From
A single-member LLC reports profit on Schedule C by default, and a multi-member LLC files a partnership return. Either way, the owners pay self-employment tax of 15.3% (12.4% Social Security plus 2.9% Medicare) on 92.35% of their net earnings. The Social Security piece stops at the 2026 wage base of $184,500, according to the Social Security Administration. Medicare has no cap.
After an S corp election, only your salary carries those taxes. The company pays 7.65% and withholds 7.65% from your paycheck, for the same 15.3% combined. Everything left after salary and expenses flows to you on a Schedule K-1 and is subject to income tax, but not payroll tax. The salary has to be reasonable for the work you do, which for most sellers means pricing out sourcing, PPC, supplier management and operations at market rates.
Break-Even Math at Three Profit Levels
The table below compares Social Security and Medicare tax only, using 2026 rates. It ignores income tax, state tax and the deduction for half of self-employment tax, so read it as a gross comparison. The salaries are illustrative, not recommendations.
| Net profit | Default LLC self-employment tax | S corp salary | Payroll tax on salary | Gross savings | After $4,000 of added costs |
|---|---|---|---|---|---|
| $60,000 | $8,478 | $35,000 | $5,355 | $3,123 | $877 worse off |
| $120,000 | $16,955 | $60,000 | $9,180 | $7,775 | $3,775 ahead |
| $200,000 | $28,234 | $80,000 | $12,240 | $15,994 | $11,994 ahead |
At $200,000, 92.35% of profit is $184,700, which is just over the wage base. Social Security tax is therefore capped at $22,878 and Medicare adds $5,356, for $28,234 in total. Below that level, every dollar of profit you move out of salary saves the full 15.3%.
The $4,000 column stands in for your new annual costs: payroll processing, quarterly payroll filings, a Form 1120-S, extra bookkeeping and any state S corp fees. Swap in your own figure. If yours is lower, the $60,000 seller is close to even. If it is higher, the line moves up.
A few things narrow the gap further. The S corp salary does not count toward the 20% qualified business income deduction, so a larger salary trims that deduction slightly. If you or your spouse already earn W-2 wages above the wage base at another job, your Social Security exposure on business profit is smaller to begin with, and so are the savings. And because Q4 can swing a seller’s profit by tens of thousands, a single strong year is weaker evidence than two steady ones.
Plugging your own salary, state and cost figures into this table is the part most sellers want a second pair of eyes on, and it is exactly what we model when you talk through your break-even point with an ecommerce CPA.
State Rules Can Move the Break-Even Point
Federal savings do not always carry over at the state level. California taxes S corporation income at 1.5%, with an $800 minimum. New York City does not recognize the federal S election and taxes S corporations under its general corporation tax, which can wipe out a good share of the benefit for a seller based there. New York State requires its own election on Form CT-6. Other states charge franchise or entity-level taxes that apply whatever your federal status.
Run the state numbers before you decide, and see our guide to cutting state taxes as an ecommerce business for broader planning ideas.
Ecommerce Numbers That Change the Answer
Revenue tells you almost nothing here. A $1 million Amazon store can net $40,000 or $250,000 depending on landed cost, referral and FBA fees, storage, returns and PPC. The election should be judged on reconciled net profit, and a lot of sellers overstate that figure because their books record Amazon deposits instead of gross sales and fees. Before you run the comparison, work through calculating Amazon FBA profit margin the right way so the profit figure you start from is real.
Inventory is the other trap. Cash spent on stock that has not sold yet is not deductible, so a seller can show $130,000 of taxable profit with only $40,000 in the bank. S corp payroll runs on a fixed schedule all year, including January through March, when many sellers are paying for spring inventory after a big Q4. Before you elect, map your cash by month and confirm you can cover payroll, payroll taxes and a full restock at the same time.
Who Cannot Use the Election
S corporation shareholders must be individuals who are US citizens or residents, estates, certain trusts or certain exempt organizations. A nonresident alien cannot hold shares, which rules out the election for most overseas sellers with a US LLC. Corporations and partnerships cannot be owners either, so a multi-member LLC with a holding company as a member does not qualify as structured.
The one-class-of-stock rule also matters for multi-member LLCs. Operating agreements written for partnership tax often include special allocations or preferred returns, and those can break the election. Distributions must follow ownership percentages, so have the agreement reviewed before you file.
Decision Mistakes Sellers Make
The most common one is electing because revenue crossed a round number. Steady net profit decides this, and two sellers with identical revenue can land on opposite sides of the line.
The second is assuming distributions are tax-free. They skip payroll tax, but you still owe income tax on all the profit, including the part you left in the business to buy inventory. The third is planning to take no salary. If you work in the business, the IRS expects wages before distributions, and the savings in the table assume a defensible salary.
When the numbers do support it, the election itself is filed on Form 2553, generally by March 15 for a calendar-year business that wants S corp treatment for that year. Everything here is general information, so test it against your own return before you file.
Frequently Asked Questions
If my profit drops after I elect, can I go back to default LLC taxation?
Yes, you can revoke the election with the consent of shareholders holding more than half the shares. The catch is timing: after a revocation, you generally cannot elect S corp status again for five years without IRS consent, so a one-year dip is usually better handled by adjusting salary than by revoking.
Is an S corp worth it in my first year of selling?
Usually not. First-year profit is hard to predict, inventory buys tie up cash, and many new stores lose money before they find a winning product. Most sellers are better served by keeping the default status until they have a full year of reconciled profit to judge.
Does an S corp lower my income tax?
Only slightly. The savings come from payroll tax. The company deducts its half of payroll tax and your salary, but all of the profit still lands on your personal return. Your federal income tax brackets stay the same.
How does the election affect retirement contributions?
In an S corp, employer contributions to a Solo 401(k) are based on your W-2 wages, not total profit. A very low salary can therefore cap how much you put away, which is one more reason to set wages at a supportable level.
Can a husband and wife who both work in the store elect?
Yes, a married couple can own an LLC that elects S corp status, and both spouses sign the election. Each spouse who works in the business should receive a reasonable salary for their own role, which raises payroll cost and changes the break-even figures above.
Find Out Whether the Election Pays for Your Store
The S corp election can save a profitable seller thousands a year, or it can add payroll and filings that eat the benefit, and the difference sits in your own profit, salary and state numbers. AMZ Accountant’s licensed CPAs bring more than 15 years of tax experience and focus on ecommerce, offering business advisory and tax planning support that models the decision before you file anything. Book a free 15-minute discovery call to see where your break-even sits, with no obligation.