"LLC vs S-Corp" is a confusing comparison because they are not alternatives. An LLC is a legal entity you form with the state. An S-Corp is a tax status you can elect with the IRS — and an LLC can elect it. So the real question is: should my LLC be taxed the default way, or as an S-Corp? The answer depends almost entirely on how much profit you make.
1. How a standard LLC is taxed
By default the IRS ignores the LLC for income tax. A single-member LLC is a "disregarded entity" (profit goes on the owner's Schedule C) and a multi-member LLC is a partnership (profit passes through on a K-1). Either way, the owners pay:
- Income tax on their share of the profit, at their personal rates.
- Self-employment tax of 15.3% (12.4% Social Security up to the annual wage base — $184,500 for 2026 — plus 2.9% Medicare on everything) on all of the net profit, whether or not they take it out of the business.
The self-employment tax is the part the S-Corp election targets.
2. How an S-Corp is taxed
An LLC taxed as an S-Corp still passes profit through to the owners with no corporate tax. The difference is that owners who work in the business must be put on payroll and paid a reasonable salary. That salary is subject to Social Security and Medicare tax (the same 15.3%, split between employer and employee). The remaining profit is taken as a distribution, which is not subject to self-employment tax.
So the saving is 15.3% on the slice of profit you take as distribution rather than salary — subject to the salary being "reasonable" for the work you do, which the IRS polices.
3. Worked example (2026 figures)
An LLC with one owner and $120,000 of net profit:
| Standard LLC | LLC taxed as S-Corp | |
|---|---|---|
| Net profit | $120,000 | $120,000 |
| Owner salary | — | $65,000 |
| Distribution | — | $55,000 |
| Social Security + Medicare tax | About $16,955 (15.3% × 92.35% × $120,000) | About $9,945 (15.3% × $65,000) |
| Extra S-Corp costs (payroll, separate return, bookkeeping) | — | About $1,500–$3,000 a year |
| Approximate net saving | — | About $4,000–$5,500 a year |
Income tax is roughly the same in both columns (the S-Corp changes how the payroll taxes are split and deducted, which shifts the figures slightly, but the headline saving comes from the distribution). Run your own numbers in our free S-Corp tax calculator.
4. When the S-Corp election makes sense
- Consistent net profit of roughly $60,000–$80,000 or more after a reasonable salary — below that, the extra costs eat the saving.
- The owner actively works in the business (so a salary is appropriate) and the business can afford to run payroll.
- US-based owners. Non-resident aliens cannot be S-Corp shareholders, so an LLC owned from abroad cannot elect S-Corp status.
- All owners are individuals (or certain trusts/estates), there are no more than 100 of them, and there is one class of ownership.
5. The hidden costs of an S-Corp
- Payroll — you must run formal payroll for owner-employees, file quarterly payroll returns and issue W-2s. Payroll software or a bookkeeper is essentially mandatory.
- A separate tax return (Form 1120-S) with K-1s for each owner, due 15 March.
- Reasonable salary risk — pay yourself too little and the IRS can reclassify distributions as wages, with penalties.
- State treatment varies — some states tax S-Corps at the entity level or charge a franchise tax (California charges 1.5% of net income, minimum $800; New York City does not recognise S-Corp status at all).
- Less flexibility — distributions must be in proportion to ownership, which rules out the custom profit splits an LLC allows.
6. Side-by-side comparison
| Standard LLC | LLC taxed as S-Corp | |
|---|---|---|
| Legal entity | LLC | LLC (unchanged) |
| Liability protection | Yes | Yes |
| Income tax | Pass-through | Pass-through |
| Self-employment tax | On all profit | On salary only |
| Payroll required | No (unless staff) | Yes, for owner-employees |
| Tax return | Schedule C or Form 1065 | Form 1120-S + K-1s |
| Owner restrictions | None | US persons only, max 100, one class |
| Profit split | Any split in the operating agreement | In proportion to ownership |
| Typical yearly extra cost | — | $1,500–$3,000 |
| Best for | New, low-profit or non-US-owned businesses | Established US businesses with steady profit |
7. How to elect
File Form 2553 with the IRS within 2 months and 15 days of the start of the tax year you want it to apply to (for a new LLC, within 2 months and 15 days of formation for the first year). Late elections are often accepted with a reasonable-cause statement. Our step-by-step guide: How to elect S-Corp status (Form 2553). Incofile can prepare and file the election for you — see the S-Corp election service.
Not sure which structure fits? Take our two-minute business entity quiz or compare LLC vs S-Corp vs C-Corp.
General information, not tax advice. Figures use 2026 federal rates and the 2026 Social Security wage base; state rules differ. Talk to a tax adviser before electing. September 2026.