LLC or S corp for e-commerce: which fits an online seller?

An LLC is a legal entity you form with a state. A single-member LLC is taxed like a sole proprietorship by default: profit goes on Schedule C and is subject to self-employment tax. The IRS sets the self-employment tax rate at 15.3%: 12.4% Social Security, up to the annual wage base, plus 2.9% Medicare.

An S corporation is a tax status. An LLC or corporation elects it on Form 2553. The business files Form 1120-S. You become an employee and receive a salary through payroll. Remaining profit passes through to you and is not subject to self-employment tax.

The S corp benefit comes from that split. The cost is payroll, a separate business return, stricter bookkeeping and, in some states and cities, entity-level taxes or fees. For a general comparison, see LLC vs. S corp.

Inventory is not deducted when you buy it. Its cost becomes cost of goods sold when the goods sell. Freight-in and import duties are part of that cost under Treas. Reg. 1.471-3. That creates gaps a service business does not have:

• Profit can exceed cash. A seller who buys heavy inventory in December may show high taxable profit with little cash in the bank.
• Salary needs cash. An S corp must run payroll and deposit payroll taxes on schedule, even in a month when cash is tied up in stock or held in platform reserves.
• Distributions need basis and cash. Taking distributions without tracking basis and cash flow leads to problems at tax time.
• Seasonality. Q4-heavy sellers often need a salary schedule that matches when cash actually comes in.

See inventory and COGS for small businesses and tariffs, landed cost and COGS.

• Profit, after cost of goods sold, is steady and expected to continue.
• You work in the business and can pay yourself a reasonable salary from cash flow.
• The employment tax difference is clearly larger than payroll, return preparation and any state or local costs.
• Your books are clean enough to support a separate business return.

It often does not fit yet when profit swings widely, most cash goes back into inventory, or you plan to raise outside capital from investors who need a C corporation.

Watch the interaction with the qualified business income deduction (Section 199A). The IRS says amounts received as reasonable compensation from an S corporation are not qualified business income, so a salary can shrink that deduction.

Reasonable compensation. The IRS says an S corp must pay reasonable compensation to a shareholder-employee for services before non-wage distributions, and may reclassify distributions as wages. Factors include training and experience, duties and responsibilities, and time devoted. See IRS S corporation compensation and medical insurance issues and our guide to S corp reasonable salary.

Accountable plan. Once you are an S corp employee, the business reimburses your home office, phone and mileage through a written accountable plan rather than you deducting them personally. See S corp accountable plan.

Health insurance. For a more-than-2% shareholder, health premiums paid by the S corp are reported as W-2 wages and may then be deductible on your personal return if IRS conditions are met.

Illustrative example only. These are made-up numbers, not a client result or a projection of savings.

An online seller has $120,000 of net profit after cost of goods sold and expenses.

• As a single-member LLC (default): self-employment tax applies to 92.35% of profit, about $110,820. At 15.3%, that is about $16,955.
• As an S corp paying a $60,000 salary: Social Security and Medicare on the salary, employer and employee shares combined, are about $9,180. The other $60,000 passes through without employment tax.

The gap of about $7,775 is before payroll service costs, state unemployment tax, the cost of a separate Form 1120-S, any state or local entity taxes, and income tax effects such as a smaller QBI deduction. Those can shrink it a lot. A $60,000 salary also has to be reasonable for the work and payable from cash, which an inventory-heavy year may not allow. Your result depends on your facts.

Best for: profitable online sellers on Shopify, Amazon, Etsy or TikTok Shop asking whether to elect S corp status, and S corp owners unsure their salary and books are right. We work with clients nationwide.

1. Free initial consultation. Share your profit, inventory and cash picture.
2. Fees quoted upfront, in writing. Transparent, fair fees in an engagement letter before work starts.
3. Run the numbers. We compare structures using your actual profit, cash flow and state, and set a defensible salary.
4. Set it up. We file Form 2553 if it fits, then set up payroll and an accountable plan.
5. Ongoing. We prepare your Form 1120-S and keep salary and distributions in line through the year.