S Corp vs LLC Taxes (2026): Which Saves You More?
- An LLC is a legal structure; an S corp is a tax election — and an LLC can choose to be taxed as an S corp. That's the source of most confusion.
- A default LLC pays 15.3% self-employment tax (Social Security + Medicare) on all its net profit, on top of income tax.
- With an S corp, you pay yourself a reasonable salary (which is subject to that 15.3%), and take the rest as distributions that avoid self-employment tax — that's the saving.
- Rule of thumb: an S corp usually pays off once net profit is around $75,000+. Below that, payroll and filing costs can outweigh the savings.
- Example: at ~$150,000 of profit, an S corp can save $8,000+ a year.
- The catch: the IRS requires a genuine reasonable salary (and actively checks), plus you must run payroll and file Form 1120-S. You elect by filing Form 2553, usually by March 15.
"Should I be an LLC or an S corp?" is one of the most common — and most misunderstood — questions US business owners ask. The short answer: it's not either/or, and the right choice can save you thousands a year in self-employment tax. Here's how the two actually compare, with real numbers.
LLC vs S corp: what's the actual difference?
This is the point that trips everyone up: they're not the same kind of thing.
- An LLC is a legal structure — it protects your personal assets and is registered with your state.
- An S corp is a tax election — a way of being taxed, granted by the IRS.
So you don't choose "LLC or S corp." You typically form an LLC, then elect to have it taxed as an S corp once it makes sense. Your legal protection stays the same; only the tax treatment changes.
How an LLC is taxed
By default, a single-member LLC is a "disregarded entity" — the IRS taxes it like a sole proprietor. You report profit on Schedule C, and that profit is hit with two taxes:
- Self-employment tax — 15.3% (12.4% Social Security + 2.9% Medicare) on all your net profit
- Federal income tax at your normal bracket, on top
The self-employment tax is the painful part: whether you leave the money in the business or take it out, every dollar of profit is exposed to that 15.3%.
How an S corp saves you tax
An S corp splits your profit into two buckets:
- A reasonable salary you pay yourself through payroll — this is subject to the 15.3% payroll tax (split between you and the company).
- Distributions — the remaining profit, paid to you as an owner. These are not subject to self-employment tax.
That second bucket is the whole game. By taking part of your income as distributions instead of salary, you legally avoid the 15.3% on that portion — while still paying normal income tax on everything.
A real example: the savings
Say your business nets $150,000 in profit:
- As an LLC: roughly 15.3% self-employment tax applies to (nearly) all $150,000.
- As an S corp: you pay yourself, say, a $70,000 reasonable salary (15.3% applies to that), and take the remaining ~$80,000 as distributions — saving the 15.3% on that $80,000.
Net result: an S corp at this level commonly saves $8,000+ per year after payroll and filing costs. Illustration only — your salary, state, and deductions change the exact figure.
The catch: reasonable salary & extra admin
S corps aren't free money — there are real strings attached:
- Reasonable salary is mandatory. You can't pay yourself $10k and take $140k in distributions. The IRS requires your salary to reflect what you'd pay someone else to do your job — and in 2026 it uses data-matching to flag S corps whose distributions dwarf their salaries.
- You must run payroll (with its own filings and costs).
- A separate return — Form 1120-S — is required each year, on top of your personal return.
⚠️ Don't lowball the salary. An unreasonably low salary is one of the top S-corp audit triggers. The savings are real and legal — but only if the salary is defensible.
When is an S corp worth it?
Because the S corp adds payroll and filing costs (typically $1,500–$3,000/year), it only pays off once the tax savings clear that hurdle. As a rough guide:
| Net profit | S corp likely worth it? |
|---|---|
| Under ~$50,000 | Usually no — costs eat the savings |
| ~$75,000 | Often the break-even point |
| $100,000+ | Usually yes — meaningful savings |
These are guidelines, not rules — the right answer depends on your salary, state taxes, and how much profit you actually pull out. A quick calculation with an accountant settles it.
How to elect S corp status
- Have an LLC (or corporation) already formed.
- File Form 2553 with the IRS to elect S corp taxation — generally by March 15 to apply to the current tax year (late-election relief is available in some cases).
- Set a reasonable salary and run payroll from then on.
- File Form 1120-S each year, plus your personal return.
💡 Tip: the election, the salary figure, and payroll setup are where mistakes get expensive. Most owners have an accountant run the numbers and handle the filing — the fee is usually a fraction of the first year's savings.
Frequently asked questions
Is an S corp better than an LLC?
They're not competitors — an LLC is a legal structure and an S corp is a tax election. Many owners form an LLC and then elect S corp taxation once profits are high enough (often around $75,000+) to make the self-employment tax savings worthwhile.
How much can an S corp save me?
The saving is roughly 15.3% on the profit you take as distributions instead of salary. At ~$150,000 profit that can be $8,000+ a year after payroll and filing costs; more at higher profits.
What is a "reasonable salary"?
It's what you'd have to pay someone else to do your role — based on duties, experience and market rates. Paying an artificially low salary to maximize distributions is a common audit trigger.
When is the deadline to elect S corp status?
File Form 2553 generally by March 15 to have the election apply to the current tax year. Late-election relief is available in certain circumstances.
Does a single-member LLC pay self-employment tax?
Yes — by default all of its net profit is subject to 15.3% self-employment tax. Electing S corp status is the main way to reduce that, by splitting profit into salary and distributions.
FincSol Accountancy calculates your exact S corp vs LLC savings, sets a defensible reasonable salary, files Form 2553, and handles payroll and your 1120-S — so you keep more without the audit risk. Freelancers, LLCs and e-commerce sellers welcome.
Message us on WhatsApp →Related reading: quarterly estimated taxes explained. Official IRS guidance is on the IRS S corporations page.