LLC vs. S-Corp for Houston Contractors: Which One Actually Saves You More Money?

You filed your taxes last April. You wrote a check to the IRS that made your stomach drop. And somewhere between signing it and mailing it, you thought: there has to be a better way.

There is. And it starts with a question most Houston contractors never actually sit down to answer: Is your business structured the right way for where your revenue is right now?

The LLC vs. S-Corp conversation is one of the most common ones we have with construction business owners in Houston and it’s also one of the most misunderstood. Most contractors either default to an LLC because it’s simple, or switch to an S-Corp because someone on a job site told them to. Neither of those is a tax strategy.

Here’s what you actually need to know.

First, Stop Thinking of These as Two Separate Things

This is the part that trips people up the most.

An LLC is a legal structure. It protects your personal assets your house, your truck, your savings account if your business gets sued or can’t pay its debts. It’s formed under Texas state law.

An S-Corp is a tax election. It’s not a separate entity. It’s a designation you file with the IRS (using Form 2553) that changes how your business income is taxed at the federal level.

Here’s the thing most people don’t realize: you don’t have to pick one over the other. The majority of contractors who benefit from S-Corp tax treatment do it inside an LLC. You form the LLC, then elect S-Corp tax status. You get liability protection from the LLC and tax savings from the S-Corp election.

So the real question isn’t “LLC or S-Corp?” It’s:

“Should my LLC stay taxed as a standard LLC, or should I elect S-Corp treatment with the IRS?”

The Tax Difference — In Plain Numbers

Standard LLC (No S-Corp Election)

By default, your single-member LLC is taxed like a sole proprietorship. Every dollar of net profit flows to your personal tax return and gets hit with self-employment (SE) tax at 15.3% — before federal income tax even enters the picture.

Example — Houston contractor netting $150,000/year:

• Self-employment tax: ~$21,195
• Federal income tax: additional, based on your bracket
• Texas franchise tax: $0 (if under the $2.65M revenue threshold — more on this below)

The problem is simple: you’re paying 15.3% on every dollar of profit, whether you take that money home or plow it back into equipment and payroll.

LLC with S-Corp Election

When you elect S-Corp status, you split your income into two buckets:

• W-2 Salary — what you pay yourself as an employee of your own company. Subject to payroll taxes.
• Distributions — the remaining profit passed to you as an owner. Not subject to SE tax.

Same contractor, same $150,000 profit — with S-Corp election:

• Reasonable salary: $75,000 → SE/payroll tax: ~$10,597
• Distribution: $75,000 → $0 SE tax
• Annual savings: ~$10,598
• Less S-Corp compliance costs (payroll + 1120-S filing): ~$3,000–$4,500
• Net savings: roughly $6,000–$7,500 per year

At $200,000 in net profit, those savings climb past $15,000 annually. Over five years, you’re looking at $75,000+ that stays with your business instead of going to the IRS.

The Catch: Your Salary Has to Be “Reasonable”

The IRS isn’t going to let you pay yourself $10,000 and take the rest as distributions. S-Corp owners who work in their business must pay themselves a reasonable salary — what you’d pay a third party to do your job.

For Houston contractors, that typically means:

• General contractors managing crews and bidding jobs: $65,000–$100,000 depending on company size
• Specialty trade owners (HVAC, plumbing, electrical): $60,000–$85,000
• Owner-operators running smaller residential crews: $55,000–$70,000

Getting this wrong — paying yourself too little — is the fastest way to attract an IRS audit. Your Construction CPA should document the salary rationale in writing, tied to industry wage data, your hours, and your responsibilities.

What Houston Contractors Need to Know About Texas Franchise Tax

Here’s the Texas-specific wrinkle that out-of-state tax blogs never cover.

Texas has no personal state income tax, which is great. But it does impose a franchise tax (also called the margin tax) on most business entities — including both LLCs and S-Corps.

2026 Texas Franchise Tax Quick Facts

The critical detail: Texas completely ignores your federal S-Corp election. Both LLCs and S-Corps are taxed the same way at the state level. Electing S-Corp status saves you on federal SE taxes — it has zero effect on your Texas franchise tax obligation.

If your construction company does exceed $2.65M in revenue, Texas lets you choose whichever of four margin calculation methods produces the lowest number. For contractors with significant materials and subcontractor costs, the revenue-minus-COGS method often wins — but you should run all four before filing.

Bottom line: Even if you owe $0 in franchise tax, you still have to file the PIR by May 15. Missing it risks a penalty and puts your LLC’s good standing at risk — which matters when you’re bidding government or commercial contracts.

So When Does the S-Corp Election Actually Make Sense?

S-Corp is likely worth it when:

• Your net profit after all business expenses is consistently above $60,000–$80,000
• You can pay yourself a reasonable salary and still have meaningful distributions left over
• You’re already working with a CPA (the incremental cost of an 1120-S is manageable)
• You want to maximize retirement contributions through a Solo 401(k) tied to your W-2 salary

S-Corp probably isn’t worth it yet when:

• Net profit is under $50,000 — the tax savings may not cover the added compliance costs
• Your revenue is highly seasonal or unpredictable
• You’re a brand-new contractor still building your client base

The tipping point for most Houston construction businesses is somewhere between $60,000 and $80,000 in annual net profit. Below that, the paperwork costs more than it saves. Above that, it’s usually a clear win.

The Deadline You Cannot Miss

If you’ve decided to elect S-Corp status, timing matters.

• Existing LLC: File IRS Form 2553 by March 15 to have it apply to the current tax year. Miss that and it defaults to the following year.
• New LLC: You have 75 days from formation to file and have it apply immediately.

There are late-election relief procedures, but they’re slower and more complicated. The cleanest move is to have this conversation with your CPA in Q3 or Q4, before year-end — not in February when you’re already behind.