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S Corp vs LLC: What Is the Difference and Which Saves More Tax?
S corp vs LLC is not an either-or choice. An LLC is a business entity formed under state law; an S corporation is a federal tax status that an eligible corporation or LLC elects on Form 2553. A default LLC owner pays self-employment tax on the whole profit. An S corporation owner who works in the business pays payroll tax on a reasonable salary instead.
The practical question behind S corp vs LLC is narrower: should my LLC keep its default tax treatment, or elect to be taxed as an S corporation? The election mainly changes how the owner's pay is taxed for Social Security and Medicare. It also adds payroll, a separate federal return, ownership limits and a five-year wait if you drop it and later want it back. Below are the rules with 2026 figures, then the same $150,000 of profit run both ways.
LLC vs S corp: an entity and a tax election
A limited liability company exists because a state statute allows it; the IRS describes an LLC as “a business structure allowed by state statute”. Federal tax law then gives each LLC a default classification under Treas. Reg. 301.7701-3: with two or more members it is a partnership, and with one member it is disregarded, so the business income lands on the owner's own return. An S corporation is not a kind of company. It is a federal tax status under IRC 1361 and 1362 that a qualifying corporation, or an LLC eligible to be taxed as one, chooses by filing Form 2553.
An LLC that files Form 2553 is treated as electing corporate classification at the same moment, so it skips Form 8832 (Form 2553 instructions; IRS Publication 3402). Federally it is then an S corporation like any other and files Form 1120-S. Under state law it is still an LLC, run under its operating agreement.
| How the LLC is taxed | How it happens | Federal return | How the working owner is taxed |
|---|---|---|---|
| Single-member LLC, default (disregarded) | No election | Schedule C with the owner’s Form 1040 | Self-employment tax on net earnings. The owner is not an employee of the LLC. |
| Multi-member LLC, default (partnership) | No election | Form 1065, with a Schedule K-1 for each member | Self-employment tax on a working member’s share of ordinary income plus guaranteed payments (K-1 box 14, code A) |
| LLC taxed as a C corporation | Form 8832 | Form 1120 | W-2 wages through payroll. The corporation pays tax on its profit, and distributions of earnings are taxed again to the owners. |
| LLC taxed as an S corporation | Form 2553 (no Form 8832 needed) | Form 1120-S, with a Schedule K-1 for each shareholder | FICA on a reasonable W-2 salary. Remaining profit passes through without payroll tax. |
A corporation formed under state law can make the same S election. Once it is in effect, the federal rules below apply the same way whether the company is an LLC or a corporation.
How a default LLC owner is taxed
In a default LLC the owner is not on payroll. A single-member owner is treated like a sole proprietor: the IRS says that owner “isn't an employee of the LLC” and owes self-employment tax on the LLC's net earnings (Publication 3402). In a multi-member LLC the partnership reports each member's net earnings from self-employment on Schedule K-1, box 14, code A. The Form 1065 instructions count a general partner's share of ordinary income plus guaranteed payments; a limited partner's share is left out under IRC 1402(a)(13), though guaranteed payments for services still count. Whether that exception can reach an LLC member who works in the business turns on the facts, so this guide assumes the working owner's full share is taxed.
The tax itself runs on Schedule SE. Net profit is multiplied by 92.35%. Social Security takes 12.4% of that amount up to the 2026 wage base of $184,500, less any W-2 wages the owner earned; Medicare takes 2.9% of all of it; and a 0.9% Additional Medicare Tax applies once earnings pass $200,000, or $250,000 on a joint return (IRC 1401). Half of the tax, apart from that 0.9%, comes off income as a deduction. What matters for this comparison is that the tax follows the profit, not the withdrawals: leaving money in the business does not lower it. The wage base itself is covered in the 2026 FICA tax limit guide.
How an S corporation owner is taxed: salary first, then distributions
Once the election takes effect, an owner who works in the business is an employee of the corporation. The IRS states it plainly: “S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee” (IRS S corporation compensation guidance). The salary runs through payroll with Social Security and Medicare withheld and matched: 7.65% from each side on wages up to $184,500 in 2026, and 1.45% from each side above that (Publication 15). Profit left after the salary and other expenses passes through on Schedule K-1 and can be distributed without payroll tax, because the IRS treats non-wage distributions as not subject to employment taxes.
What counts as reasonable? The IRS publishes no formula. It starts with where the company's gross receipts come from: receipts the owner's own services produce point to wages, while receipts from other employees or from capital and equipment can support distributions. Its list of factors includes training and experience, duties and responsibilities, time devoted, dividend history, pay to non-shareholder employees, the timing and manner of bonuses, what comparable businesses pay for similar services, compensation agreements and the use of a formula. It adds that reasonable compensation “will never exceed the amount received by the shareholder,” and it can reclassify distributions as wages when the salary is too low. Setting the number is covered in owner draw vs. salary and, for agencies, in S corp owner salary in payroll.
The salary is paid like any employee's: income tax withholding, a Form 941 each quarter, Form 940 and a Form W-2 at year end (IRS S corporations page). The owner still reports the K-1 income on Form 1040 and pays estimated tax on whatever withholding does not cover. BEG runs owner payroll through Managed Payroll, from $25 per employee per month, and the S corporation payroll glossary entry covers the basics. Owners moving from draws to a salary for the first time will find the rules by entity type in payroll for LLC owners.
S corp vs LLC taxes: $150,000 of profit both ways
| Step | Default LLC | S corporation, $70,000 salary |
|---|---|---|
| Profit before any owner pay | $150,000 | $150,000 |
| Owner’s W-2 salary | None | $70,000 |
| Employer half of Social Security and Medicare on the salary | None | $5,355 |
| Profit passed through to the owner | $150,000 | $74,645 |
| Self-employment tax, or FICA on the salary (both halves) | $21,194 | $10,710 |
| Adjusted gross income | $139,403 | $144,645 |
| QBI deduction | $24,661 | $14,929 |
| Taxable income after the $16,100 standard deduction | $98,642 | $113,616 |
| Federal income tax at 2026 single rates | $16,413 | $19,866 |
| Payroll or self-employment tax plus income tax | $37,607 | $30,576 |
The payroll tax gap is $10,484. The LLC owner pays 15.3% on 92.35% of the full $150,000; the S corporation pays 15.3% only on the $70,000 salary. Income tax moves the other way by $3,453. The salary is not qualified business income, so the S corporation owner's QBI deduction is $9,732 smaller, and the employer's $5,355 share of FICA is a smaller write-off than the LLC owner's $10,597 deduction for half of self-employment tax. Net of both, the S corporation version shows $7,031 less federal tax, before its own costs. Each $10,000 of added salary adds $1,530 of Social Security and Medicare tax below the wage base and shrinks the QBI deduction.
What this illustration leaves out:
- The cost of running payroll and preparing Form 1120-S every year.
- Federal unemployment tax on the first $7,000 of the salary, and state unemployment tax.
- State income, franchise or entity-level taxes, which differ by state.
- Health insurance and retirement contributions, which follow W-2 pay (covered below).
- Higher incomes, where the wage base and the QBI wage limits change the math, and other filing statuses.
The QBI deduction: why the salary counts twice
Section 199A lets owners of pass-through businesses deduct up to 20% of qualified business income. P.L. 119-21 (section 70105) removed its 2025 end date, widened the phase-in range to $75,000 ($150,000 on a joint return) and added a $400 minimum deduction for owners with at least $1,000 of QBI from a business they materially participate in, starting in 2026. Two rules drive the S corp vs LLC comparison: reasonable compensation an S corporation pays you is not QBI (IRC 199A(c)(4)(A)), and the corporation's deduction for that salary reduces its QBI (Treas. Reg. 1.199A-3). In a default LLC, only the deductible half of self-employment tax reduces QBI (Treas. Reg. 1.199A-3(b)(1)(vi)).
At higher incomes the salary can help rather than hurt. Above the 2026 thresholds below, the deduction for each business starts to be capped at the greater of 50% of the W-2 wages it pays, or 25% of those wages plus 2.5% of its qualified property, and the cap applies in full at the top of the range (IRC 199A(b); thresholds from Rev. Proc. 2025-32). An S corporation owner's salary counts as W-2 wages paid by the business. A default LLC with no employees pays none, so above the range its owner's deduction for that business can fall to zero unless it holds qualified property. Specified service businesses, including health, law, accounting, consulting and financial services, lose the deduction entirely above the range.
| 2026 filing status | Wage limit starts above | Applies in full above |
|---|---|---|
| Married filing jointly | $403,500 | $553,500 |
| Married filing separately | $201,775 | $276,775 |
| All other returns | $201,750 | $276,750 |
Who can elect S corporation status
The company must meet the “small business corporation” tests in IRC 1361(b) for as long as the election lasts, not just on the filing date. Failing one later ends the election.
| Requirement | What it means | Source |
|---|---|---|
| Domestic entity | A U.S. corporation, or an LLC eligible to be taxed as one. Banks that use the reserve method for bad debts, insurance companies taxed under subchapter L and DISCs cannot elect. | IRC 1361(b) |
| 100 shareholders or fewer | A married couple, and the members of a family, can count as one shareholder. | IRC 1361(b)(1)(A); Form 2553 instructions |
| Allowed shareholders only | Individuals, estates, certain trusts and certain tax-exempt organizations. No partnerships, corporations or nonresident aliens. | IRC 1361(b)(1)(B), (C) |
| One class of stock | Every share, or LLC membership interest, carries identical rights to distributions and liquidation proceeds. Different voting rights are allowed. | IRC 1361(b)(1)(D); Form 2553 instructions |
| Every shareholder consents | All shareholders on the day the election is made must consent to it. | IRC 1362(a)(2) |
| A permitted tax year | A calendar year, or a natural business, ownership or section 444 year, among others. | Form 2553 instructions |
For an LLC, the operating agreement is where the one-class-of-stock test is won or lost: membership interests need identical rights to distributions and liquidation proceeds. An LLC owned in part by another company taxed as a corporation or partnership cannot elect, and a shareholder who becomes a nonresident alien, or a transfer of shares to one, ends the election on that date (IRC 1362(d)(2)).
Form 2553: the deadline, late elections and acceptance
File Form 2553 no more than 2 months and 15 days after the start of the tax year the election should take effect, or at any time during the year before (Form 2553 instructions; IRC 1362(b)). For a calendar-year company that was March 16, 2026 for 2026, because March 15 fell on a Sunday (Publication 509 (2026)). For 2027 it is March 15, 2027, a date computed from the rules because Publication 509 (2027) is not out yet. Both are on the business tax calendar. An election filed after the deadline counts for the following year.
Missed it? The Form 2553 instructions describe relief under Rev. Proc. 2013-30 when the company intended S status for the date on line E, failed to qualify only because the form was late, had reasonable cause and acted diligently once it found the error, and files within 3 years and 75 days of that date with consistent-reporting statements from every shareholder. The form is marked “FILED PURSUANT TO REV. PROC. 2013-30.” Outside those conditions, relief generally takes a private letter ruling and a user fee. Once filed, the IRS should confirm acceptance; if no letter arrives within 2 months, the Form 1120-S instructions say to call 800-829-4933.
What S corporation status costs to run
| Default LLC | S corporation | |
|---|---|---|
| Federal income tax return | One member: no separate return (Schedule C). Two or more members: Form 1065. | Form 1120-S every year the election is in effect, due the 15th day of the 3rd month after year end. |
| Owner pay | Draws. No payroll for the owner. | A salary through payroll: withholding, Form 941 each quarter, Form 940 and Forms W-2. |
| Return filed late with no tax due | Form 1065: $255 per partner per month, up to 12 months. | $255 per shareholder per month, up to 12 months. |
| Estimated tax | Owners pay with Form 1040-ES. | Owners pay with Form 1040-ES or through salary withholding. The corporation pays estimates only for certain entity-level taxes. |
| Who can own it | No maximum number of members, and most states allow corporations, other LLCs and foreign owners. | Up to 100 eligible shareholders and one class of stock. |
| Changing course | A new classification on Form 8832, then generally 60 months before another change. | Revocation by owners of more than half the shares, then generally 5 years before a new S election. |
State rules sit on top of these. Some states tax S corporations at the entity level, and filing requirements vary, so check your state tax agency before counting on the federal math alone.
Health insurance and retirement plans follow the W-2
Health insurance
Premiums an S corporation pays for a shareholder who owns more than 2% go on that shareholder's W-2 as wages in box 1, but not in boxes 3 and 5 when paid under a plan for employees generally, so they add no Social Security or Medicare tax (IRS). The shareholder can then take the self-employed health insurance deduction on Form 1040 if the coverage was established by the corporation and neither the shareholder nor the shareholder's spouse was eligible for a subsidized health plan (IRC 162(l); Form 7206 instructions). A default LLC owner claims the same deduction through Form 7206, with the policy in the name of the business or the owner.
Retirement contributions
Contributions come only from compensation. For an S corporation owner that means W-2 wages: the IRS says shareholder distributions “do not constitute earned income for retirement plan purposes” (IRS retirement plan FAQ). A SEP, for example, allows employer contributions of up to 25% of an employee's compensation, capped at $72,000 on compensation up to $360,000 for 2026 (Publication 560; Notice 2025-67). In the illustration above, the $70,000 salary supports a SEP contribution of up to $17,500. The default LLC owner's limit is 20% of net earnings after the self-employment tax deduction, about $27,881 on the same $150,000. An owner who plans large retirement contributions should test the salary against that goal before electing. The SEP IRA glossary entry explains how the plan works.
Ending an S election, or going from an S corp back to an LLC
An election stays in effect until it is terminated (IRC 1362(c)). Shareholders holding more than half of the shares can revoke it. A revocation can name any date on or after the day it is made; if it names none, one made by the 15th day of the 3rd month of the tax year takes effect at the start of that year, and a later one at the start of the next year (IRC 1362(d)(1); Form 1120-S instructions). The election also ends automatically if the company stops qualifying.
Two consequences are easy to miss. The first is the five-year rule: once an election ends, the corporation generally cannot elect S status again before its fifth tax year after the first year of the termination without IRS consent (IRC 1362(g)). The second applies to LLCs. The Form 2553 filing was also an election to be taxed as a corporation, and that classification stays in place after the S election ends (Treas. Reg. 301.7701-3(c)(1)(v)(C)), so the LLC becomes a C corporation unless it files Form 8832. Changing from corporate to partnership or disregarded status is treated as if the corporation distributed all of its assets and liabilities to its owners in liquidation (Treas. Reg. 301.7701-3(g); Publication 3402), which can create tax, and another classification change generally waits 60 months. Converting a state-law corporation into an LLC is a state filing with federal consequences of its own; model it with a tax professional before filing.
S corp vs LLC: a decision checklist
Signs to keep default LLC taxation
- A reasonable salary for the work you do would use up most of the profit.
- An owner is a corporation, a partnership or a nonresident alien.
- Owners want distributions that do not follow ownership percentages.
- You may change the structure again within five years.
- Profit is small, uneven or often close to zero.
Signs the S election is worth modeling
- You work in the business and profit is well above a reasonable salary for that work.
- The business already runs payroll, or can run it every pay period.
- Every owner is an eligible shareholder with identical rights to distributions.
- Taxable income is near or above the QBI thresholds, where W-2 wages can protect the deduction.
- You have checked how your state taxes S corporations.
An S corporation owner still makes quarterly payments on profit that withholding does not cover, or raises withholding on the salary instead; quarterly estimated taxes covers both routes. Owners who hold company meetings at home can read how the Augusta rule works and where it has failed in court.
Anthony leads sales at Business Executive Group, a national HR services firm that runs payroll for owner-employees of S corporations. Tax planning work is done by licensed tax professionals at BEG's tax partner.
Sources: IRS, Limited liability company (LLC); IRS Publication 3402, Taxation of Limited Liability Companies (Rev. March 2020); 26 CFR 301.7701-2, business entities; 26 CFR 301.7701-3, classification of certain business entities; IRS, Instructions for Form 2553 (Rev. December 2020); IRS, S corporations; IRS, S corporation compensation and medical insurance issues; 26 U.S.C. 1361, S corporation defined; 26 U.S.C. 1362, election, revocation, termination; 26 U.S.C. 1401, rate of self-employment tax; 26 U.S.C. 1402, self-employment income; IRS, Schedule SE (Form 1040) 2025; IRS, Instructions for Form 1065 (2025); IRS, Instructions for Form 1120-S (2025); IRS Publication 15 (2026), Employer’s Tax Guide; IRS, Form 1040-ES (2026); IRS Publication 509 (2026), Tax Calendars; 26 U.S.C. 199A, qualified business income; 26 CFR 1.199A-3, qualified business income; IRS, Rev. Proc. 2025-32 (2026 inflation adjustments); Public Law 119-21 (July 4, 2025), section 70105; 26 U.S.C. 162, trade or business expenses; IRS, Instructions for Form 7206 (2025); IRS, Retirement plan FAQs regarding contributions: S corporation; IRS Publication 560 (2025), Retirement Plans for Small Business; IRS, Notice 2025-67 (2026 retirement plan limits). Figures and rules checked against these sources on September 25, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.
S corp vs LLC questions
What is the difference between an S corp and an LLC?
An LLC is a legal entity formed under state law. An S corporation is a federal tax status that an eligible corporation or LLC elects on Form 2553. That is why a business can be an LLC under state law and an S corporation for federal income tax at the same time.
Is an LLC or an S corp better for taxes?
Neither is better in general. A default LLC owner pays self-employment tax on all of the profit. An S corporation owner pays payroll tax on a reasonable salary but has a smaller QBI deduction and extra costs. In this guide’s $150,000 illustration the S corporation version showed $7,031 less federal tax before those costs. A higher salary or a lower profit shrinks the gap.
Can an LLC be taxed as an S corp?
Yes. An eligible LLC files Form 2553, and the IRS treats that filing as an election to be taxed as a corporation too, so the LLC does not file Form 8832 first. It then files Form 1120-S each year like any other S corporation.
Is an LLC taxed as an S corp different from an S corp?
Not for federal income tax. Both are S corporations under IRC 1361 and follow the same salary, distribution and Form 1120-S rules. The differences are in state law, such as the governing documents and the state filings.
Is a single-member LLC better than an S corp?
A single-member LLC is disregarded by default: its profit goes on Schedule C, and all of it is subject to self-employment tax. The same LLC can elect S status and pay its owner a salary. The election is worth modeling when profit is well above a reasonable salary for the owner’s work and the owner can run payroll.
When is Form 2553 due for 2027?
For a calendar-year business, March 15, 2027, which is 2 months and 15 days after the tax year begins. That date is computed from the rules because Publication 509 (2027) has not been released. You can also file at any time during 2026 for a 2027 start.
What if I missed the Form 2553 deadline?
A late election is treated as made for the next tax year unless relief applies. Under Rev. Proc. 2013-30, relief is available within 3 years and 75 days of the intended effective date when the business meets the conditions in the Form 2553 instructions, including reasonable cause and consistent reporting by every shareholder.
How much salary should an S corp owner pay?
There is no IRS formula. The salary should be reasonable for the services the owner provides, judged by factors the IRS lists, such as duties, time devoted, training and experience, and what comparable businesses pay. The IRS also says reasonable compensation never exceeds what the shareholder actually receives.
Can S corp distributions fund a 401(k) or SEP?
No. Retirement plan contributions come from compensation, and the IRS says S corporation distributions are not earned income for retirement plan purposes. Contributions for an owner-employee are figured on W-2 wages.
Can I change my S corp back to a regular LLC?
Shareholders holding more than half of the shares can revoke the election. An LLC that revokes becomes a C corporation unless it also files Form 8832, and a change from corporate to partnership or disregarded status is treated as a liquidation of the corporation. A new S election generally waits five years.
Do S corp owners still pay quarterly estimated taxes?
Usually, on profit that withholding does not cover. Shareholders pay estimates with Form 1040-ES, but income tax withheld from the owner’s salary counts too, and withholding is treated as paid evenly through the year, so raising it can replace estimates.
Does an S corporation pay state tax?
It depends on the state. Some states tax S corporations at the entity level, and state filing rules vary. Check your state tax agency before you elect.
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