An LLC taxed as an S-corp can cut your self-employment tax bill significantly once your business earns enough profit — but it also adds payroll obligations, IRS scrutiny, and annual compliance costs. Whether the switch makes sense for your Texas LLC depends on your net profit level, how much you pay yourself, and how you weigh tax savings against added complexity.

How Texas taxes an LLC by default

Texas does not have a state personal income tax. That means the state-level tax picture for a Texas LLC is simpler than most states.

What Texas does collect from LLCs:

1. Franchise tax — owed by all Texas LLCs regardless of federal tax election. The 2026 no-tax-due threshold is $2,650,000 in annualized total revenue. Above that, the rate is 0.375% for retail/wholesale businesses and 0.75% for all others.

2. Sales tax — if your LLC sells taxable goods or services (separate from the LLC/S-corp question entirely).

What Texas does NOT collect:

• State income tax on LLC profits
• State payroll tax on wages (though you still owe federal payroll taxes)

This means the Texas franchise tax applies the same way whether your LLC is taxed as a disregarded entity, partnership, or S-corp. The S-corp election does not change your Texas franchise tax rate or threshold.

The federal tax difference: pass-through vs S-corp

The core reason owners consider an S-corp election is federal self-employment (SE) tax savings.

Default LLC (pass-through) taxation

By default, a single-member LLC is taxed as a sole proprietorship; a multi-member LLC is taxed as a partnership. In both cases:

• All net business profit flows to your personal return
• If you actively work in the business, all net profit is subject to self-employment tax (15.3% on the first ~$176,100 of net earnings; 2.9% above that for the Medicare portion)
• No payroll required — you simply pay SE tax at tax time

S-corp election taxation

With an S-corp election (IRS Form 2553), your LLC is taxed as an S-corporation:

• You split your income into salary and distributions
• Salary is subject to payroll taxes (Social Security + Medicare, same as SE tax)
• Distributions are NOT subject to self-employment or payroll taxes
• You save SE tax on the distribution portion

Example (simplified): If your LLC nets $200,000 and you pay yourself a reasonable $80,000 salary, you owe SE/payroll tax only on $80,000 — not the full $200,000. The $120,000 distribution escapes the 15.3% SE tax, saving roughly $18,360.

The catch: costs and obligations that come with S-corp status

S-corp election is not free. Before you calculate savings, account for:

These costs reduce — and at lower income levels can eliminate — the tax savings from the S-corp election.

When the S-corp election typically makes financial sense

The breakeven point depends on your specific situation, but most CPAs suggest considering an S-corp election when your LLC's net profit consistently exceeds $50,000–$80,000 per year. Below that, the added compliance costs typically exceed the SE tax savings.

The S-corp election is worth evaluating if:

• Your net profit is $80,000+ annually
• You are actively working in the business (and thus subject to SE tax)
• You can support a payroll system
• You want to deduct health insurance premiums through payroll

The S-corp election is probably not worth it if:

• Your profit is below $50,000
• Your revenue fluctuates heavily year to year
• You prefer simple compliance (no payroll, no separate corporate return)
• You're near the Texas franchise tax no-tax-due threshold and compliance simplicity matters

Texas franchise tax: S-corps and LLCs pay the same

One question Texas LLC owners frequently ask: does an S-corp election reduce the Texas franchise tax? No. Texas franchise tax applies based on entity type and revenue, not federal tax election. An LLC that elected S-corp status still owes the franchise tax under the same rules as any other LLC — same threshold ($2,650,000), same rates (0.375% or 0.75%), same May 15 deadline, same PIR requirement.

See the Texas LLC annual filing checklist for a full rundown of what you owe at the state level regardless of your federal election.

Quick reference

FAQ

What happens if I don't pay myself a reasonable salary as an S-corp?

The IRS can reclassify your distributions as wages, assess back payroll taxes, and add penalties and interest. "Reasonable compensation" means a salary comparable to what you'd pay someone else to do your job. This is the most audited aspect of S-corp taxation — underpaying yourself to minimize payroll taxes is a red flag.

Does Texas have its own S-corp rules?

No. Texas recognizes the federal S-corp election for income tax purposes — but since Texas has no state income tax, there's no separate Texas S-corp return or income tax calculation. Your Texas obligation remains the franchise tax, which is unaffected by your federal election.

Can an LLC elect S-corp status at any time?

No. To have S-corp taxation apply to a given tax year, you must file IRS Form 2553 by March 15 of that year (for calendar-year LLCs) or within 75 days of the LLC's formation. Late elections are possible with IRS approval but require additional documentation. Work with a CPA to time the election correctly.

Do I still owe Texas franchise tax after making an S-corp election?

Yes. Texas franchise tax applies to all LLCs and corporations doing business in Texas, regardless of federal tax election. The S-corp election has no effect on your Texas franchise tax rate, threshold, forms, or May 15 deadline.

Last verified: 2026-04-27

Sources: Texas Comptroller — Franchise Tax | IRS — S Corporations