Why NYC is Different: The Dual Profit Puzzle
The most critical concept in any NYC tax analysis is that your business has two different profit figures: a lower one for federal taxes and a higher one for city taxes. This is due to a state tax strategy called the Pass-Through Entity Tax (PTET).
Federal Profit
$162,037
Used for SE Tax, FICA & QBI
PTET Add-Back
$83,000
A non-deductible city expense
NYC-Adjusted Profit
$245,036
Used for UBT & GCT
The $175,500 Crossover Point
This chart visualizes the total annual tax cost for an LLC versus an S-Corp across different profit levels. The point where the lines cross is the financial break-even point where the strategic advantage flips from one entity to the other.
Your 2025 Projection at $162,037 Profit
At your current profit level, the S-Corporation holds a modest advantage. The FICA tax savings are just enough to overcome the higher NYC tax burden. Here's how the total tax costs break down.
S-Corp Advantage
$1,228
Annual Tax Savings
LLC Total Cost
$22,427
S-Corp (40% Salary)
$21,199
Deep Dive: The PTET & SALT Cap Workaround
The "Dual Profit" situation exists because of a beneficial tax strategy. It's not a penalty, but a solution to the federal $10,000 State and Local Tax (SALT) cap. Both LLCs and S-Corps can use it.
1. The Problem
The $10,000 federal SALT cap limits your personal deduction for state taxes.
2. The Solution: PTET
The LLC pays your state tax for you, making it a fully deductible business expense.
3. The Federal Effect
This deduction lowers your federal profit, saving you federal tax.
4. The NYC Effect
NYC requires this deduction to be "added back," creating a higher city profit base.
This strategy is beneficial regardless of your entity choice. It reduces your federal tax bill while being neutral for city tax purposes.
Common Question: What is "Reasonable Compensation"?
For an S-Corp, the IRS requires you to pay yourself a "reasonable" salary for the work you perform. This is the most critical compliance risk for S-Corps.
The S-Corp Strategy
The goal is to pay a salary that is high enough to be defensible to the IRS, but low enough to maximize payroll tax savings on the remaining profit, which is taken as a distribution.
The Risk
Setting a salary too low is a major audit red flag. If challenged, the IRS can reclassify your distributions as wages and assess back taxes, penalties, and interest. The 40% salary used in this analysis is often defensible but requires documentation.
The Consistent Advantage: The QBI Deduction
The 20% Qualified Business Income (QBI) deduction is a powerful federal tax break. While both structures benefit, the LLC always gets a larger tax shield.
LLC QBI Shield
Based on Full Federal Profit
$7,778
Annual Tax Savings
S-Corp QBI Shield
Based on Profit AFTER Salary
$4,667
Annual Tax Savings (at 40% Salary)
This gives the LLC a consistent **$3,111 annual advantage** in this category. Note: The QBI deduction is scheduled to expire after 2025.
Data Deep Dive: 11 Profit Scenarios
The following table provides the detailed calculations for each profit scenario, showing precisely how the tax costs evolve and where the crossover point occurs.
| Federal Profit | LLC Total Cost | S-Corp (40%) Cost | Winner | Annual Savings |
|---|---|---|---|---|
| $75,000 | $11,940 | $10,517 | S-Corp | $1,423 |
| $100,000 | $14,777 | $13,081 | S-Corp | $1,696 |
| $150,000 | $20,447 | $18,211 | S-Corp | $2,236 |
| $162,037 | $22,427 | $21,199 | S-Corp | $1,228 |
| $175,500 | $22,954 | $22,951 | Break-Even | $3 |
| $200,000 | $23,916 | $26,162 | LLC | $2,246 |
| $300,000 | $28,536 | $39,244 | LLC | $10,708 |
| $400,000 | $33,293 | $52,325 | LLC | $19,032 |
| $500,000 | $38,050 | $62,442 | LLC | $24,392 |
| $1,000,000 | $66,835 | $135,810 | LLC | $68,975 |
Your Strategic Roadmap
Analyze Your 2025 Profit Projection
Your decision hinges on your expected growth. Do you anticipate your federal profit staying below or growing beyond the ~$175.5k crossover point?
If Profit Stays Below $175.5k
The **S-Corporation (at 40% salary)** is the most tax-efficient choice. The modest tax savings (~$1,228) should be weighed against the real-world costs of S-Corp compliance (payroll, corporate filings). To elect this for 2026, you must file Form 2553 by March 15, 2026.
If Profit Grows Above $175.5k
The **LLC** becomes the clear winner, with savings growing dramatically as profit increases. Remaining an LLC avoids the cost and complexity of converting to an S-Corp, only to find it's no longer the optimal choice.
This analysis is a snapshot. An annual review is critical to ensure your business structure remains optimal as tax laws and your profits change.