Client Decision Matrix
Multi-Member LLC
- Owner's total household income BELOW $394.6K
- Business profit under $425K
- Primarily NYC-based operations
- Prefer administrative simplicity
- Passive ownership structure
- Complex profit-sharing needs
S Corporation
- Owner's total household income ABOVE $494.6K
- Business profit consistently above $575K
- Multi-state business operations
- Planning for business sale/exit
- Want fringe benefit optimization
- Can handle "reasonable salary" compliance
🚨 The "QBI Cliff" - Most Critical Factor
The QBI deduction phases out between $394.6K-$494.6K household income (MFJ). Above $494.6K, LLCs lose their ENTIRE QBI deduction due to the W-2 wage limitation, while S Corps preserve theirs. This creates massive swings of $15K-$50K+ annually.
Quick Reference: Expected Annual Advantages (2025)
| Business Profit Range |
Income Below $394.6K |
Income Above $494.6K |
Key Decision Factor |
| $100K - $200K |
LLC: $6K - $13K |
S Corp: ~$2K - $9K |
QBI threshold critical |
| $250K |
LLC: ~$13,400 |
S Corp: ~$14,500 |
QBI maximization vs preservation |
| $350K - $500K |
LLC: $6K - $18K |
S Corp: $15K - $25K |
The "QBI Cliff" effect |
| $600K |
LLC: $15K - $20K |
S Corp: $14.5K |
Documented cliff scenario |
| $750K - $1M+ |
LLC: $20K+ |
S Corp: $20K - $50K+ |
Clear S Corp territory |
The $394.6K-$494.6K Phase-Out Band is THE Primary Decision Point
Below $394.6K: LLC wins | Above $494.6K: S Corp wins | In between: Model both scenarios
🎯 The "QBI Cliff"
Above $494.6K income, LLCs lose their ENTIRE 20% QBI deduction due to W-2 wage limitations. S Corps preserve theirs through required salary payments.
🏢 NYC Tax Advantage
LLC UBT: 4% × (profit – allowances) less 23% credit ≈ 3.08% vs S Corp GCT: 8.85% gross, ~5.56% net after federal shield.
📋 Compliance Burden
S Corps require reasonable salary documentation ($3.5K-$6K annual costs). LLCs simpler but less planning flexibility ($1.5K-$2.5K costs).
💰 FICA/SE "Future Benefits"
Both structures fund identical Social Security/Medicare benefits. S Corp salary optimization reduces current payments but represents retirement savings.
Bottom Line Decision Rule (2025)
If owner's household income > $494.6K: Choose S Corporation
If owner's household income < $394.6K: Choose LLC
If in $394.6K-$494.6K phase-out band: Model both scenarios carefully
⚠️ 2026 Alert: QBI deduction expires 12/31/2025. If not extended, LLC advantages become overwhelming for most businesses in 2026+.
Complete Reference Guide
Executive Summary
Primary Decision Point: Owner's total household taxable income relative to the $394.6K-$494.6K QBI phase-out band (MFJ).
| Business Profit |
Likely Winner |
Key Driver |
Typical Advantage |
| <$120K |
LLC |
UBT exemption + full §199A |
$3K-$8K |
| $120K-$425K |
LLC |
Lower city tax outweighs payroll savings |
$5K-$15K |
| $425K-$575K |
Grey Zone |
Salary %, admin costs, other income |
Model both |
| >$575K |
S-Corp |
SS cap reached; GCT < payroll savings |
$20K-$50K+ |
Core Tax Constants (2025)
| Parameter |
2025 Value |
Authority |
| Social Security wage base |
$176,100 |
SSA 2025 fact sheet |
| NYC UBT |
4% × (profit – allowances) less 23% credit ≈ 3.08% |
NYC Admin Code §11-503 |
| NYC GCT |
8.85% × (profit – salary) |
NYC Admin Code §11-604 |
| §199A threshold (MFJ) |
$394,600 |
Rev. Proc. 2024-40 |
| §199A phase-out top (MFJ) |
$494,600 |
Rev. Proc. 2024-40 |
| Federal marginal rate |
37% |
IRC §1 |
Tax Calculation Mechanics
City Tax Calculations
LLC (UBT)
UBT Deduction = $5K (entity) + $10K × 2 (partners) = $25K
Gross UBT = (Profit - $25K) × 4%
Net UBT = Gross UBT × (1 - 23% credit)
Federal Shield = Net UBT × 37%
Final UBT = Net UBT - Federal Shield
S Corporation (GCT)
Distribution = Profit - Salary
Gross GCT = Distribution × 8.85%
Federal Shield = Gross GCT × 37%
Final GCT = Gross GCT - Federal Shield
QBI Deduction - The "QBI Cliff"
Below $394.6K income: Full 20% deduction available
$394.6K-$494.6K: Phase-out applies
Above $494.6K income: Limited by 50% of W-2 wages
LLC QBI
Below threshold: 20% × Full Profit
Above threshold: $0 (no W-2 wages)
S Corporation QBI
Below threshold: 20% × Distribution (not full profit)
Above threshold: MIN(20% × Distribution, 50% × Salary)
Five-Step Decision Framework
Step 1: Determine NYC-Sourced Profit
- Calculate profit attributable to NYC operations
- If <$425K, LLC usually cheaper due to city tax advantage
- Consider multi-state apportionment impact on GCT
Step 2: Assess Total Household Income
- Include all sources: spouse income, investments, other businesses
- High income triggers §199A wage limitations
- Above $494.6K MFJ strongly favors S-Corp
Step 3: Set Defendable Salary (S-Corp Only)
- Research industry standards and job responsibilities
- Target 40-60% of business profit
- If reasonable salary exceeds 70% of profit, consider LLC
Step 4: Factor Administrative Appetite
- S-Corp: Payroll processing, GCT returns, audit risk ($3.5K-$6K annually)
- LLC: Simpler compliance, estimated taxes only ($1.5K-$2.5K annually)
- Consider internal capacity and risk tolerance
Step 5: Model §199A Sunset Scenarios
- QBI deduction expires 12/31/2025 unless extended
- Without QBI, S-Corp advantages shrink significantly
- Plan potential entity conversions for 2026+
Primary Authorities & References
Statutory & Regulatory
- NYC Administrative Code § 11-602(8) & § 11-603 — GCT base & rate
- NYC UBT instructions & IT-219 — UBT resident credit
- IRC § 1402 & IRS Publication 334 — Self-employment tax
- IRC § 199A & Rev. Proc. 2024-40 — QBI thresholds & limitations
- IRC § 3101(b)(2) & IRS Topic 560 — Additional Medicare tax
- SSA 2025 wage-base fact sheet — Social Security wage base
Professional Commentary
- NYSSCPA TaxStringer article: "When an S-Corp Stops Making Sense in NYC"
- Medows CPA blog: "S-Corp vs LLC: Beware the 8.85% NYC Hit"
- George Dimov CPA: "Run the Math Before Electing S Status"
- Strategic Tax Planners LLC: "NYC and the Unfriendly S Corporation"
- Robert P. Russo CPA practice guides on entity selection