S-Corp vs LLC Tax Comparison: Choosing the Right Business Structure
LLC vs S-Corp taxation with worked examples at $100K and $200K profit. When the S-Corp election saves money vs staying LLC.
“Should I be an LLC or an S-Corp?” is one of the most common questions self-employed people ask. The answer depends on your net profit, your tolerance for compliance, and how you plan to grow. This guide walks through the tax mechanics of both structures with real numbers so you can make an informed decision.
Key Takeaways
- A single-member LLC is taxed as a sole proprietorship by default---you pay 15.3% self-employment tax on all net profit.
- An S-Corp election lets you split income into salary (taxed) and distributions (not subject to payroll tax).
- The break-even point is typically around $60K+ net profit, after accounting for S-Corp compliance costs ($2,000-$5,000/year).
- Both structures can qualify for the 20% QBI deduction, but the math differs.
- An S-Corp is a tax election, not a separate entity. Your LLC can elect S-Corp taxation without forming a new company.
How an LLC Is Taxed by Default
An LLC itself does not have a tax classification. It is a state-level legal entity that provides liability protection. For federal tax purposes:
- Single-member LLC: Taxed as a sole proprietorship (Schedule C)
- Multi-member LLC: Taxed as a partnership (Form 1065 + Schedule K-1s)
In either case, all net profit flows through to your personal return and is subject to:
- Federal income tax at your marginal rate
- Self-employment tax at 15.3% (12.4% Social Security + 2.9% Medicare)
The Social Security portion applies up to the wage base: $176,100 in 2025 and an estimated $183,000 in 2026. Medicare has no cap and adds an extra 0.9% above $200,000 ($250,000 MFJ).
For a deeper look at LLC default taxation, see our LLC taxes explained guide.
How an S-Corp Is Taxed
An S-Corp is not a separate type of company---it is a tax election made by filing Form 2553 with the IRS. Your LLC continues to exist at the state level; only the federal tax treatment changes.
With an S-Corp election:
- You pay yourself a reasonable W-2 salary (subject to payroll taxes)
- Remaining profit is distributed as shareholder distributions (not subject to payroll taxes)
- The business files Form 1120-S and issues K-1s to shareholders
The key benefit: distributions bypass the 15.3% self-employment tax. Only the salary portion is subject to payroll taxes.
For details on what “reasonable” means, see our S-Corp reasonable compensation guide.
Side-by-Side Comparison: $100,000 Net Profit
Let’s compare a single-member LLC (default) vs the same LLC with an S-Corp election. We’ll assume a reasonable salary of $60,000.
LLC (Sole Proprietorship)
| Item | Amount |
|---|---|
| Net profit | $100,000 |
| SE tax base (92.35% of net profit) | $92,350 |
| Self-employment tax (15.3%) | $14,130 |
| Deductible half of SE tax | $7,065 |
| Adjusted gross income | $92,935 |
S-Corp (with $60,000 salary)
| Item | Amount |
|---|---|
| Net profit | $100,000 |
| W-2 salary | $60,000 |
| Employer payroll taxes (7.65%) | $4,590 |
| Employee payroll taxes (7.65%) | $4,590 |
| Total payroll taxes | $9,180 |
| Shareholder distribution | $35,410 ($100K - $60K salary - $4,590 employer taxes) |
Tax Savings at $100K
| LLC | S-Corp | Difference | |
|---|---|---|---|
| Payroll/SE tax | $14,130 | $9,180 | $4,950 saved |
After subtracting roughly $2,000-$3,000 in additional S-Corp compliance costs (payroll service, Form 1120-S preparation, state fees), the net savings are approximately $2,000-$3,000 per year.
Side-by-Side Comparison: $200,000 Net Profit
At higher income levels, the S-Corp advantage grows substantially. We’ll assume a reasonable salary of $80,000.
LLC (Sole Proprietorship)
| Item | Amount |
|---|---|
| Net profit | $200,000 |
| SE tax base (92.35%) | $184,700 |
| Social Security tax (12.4% on first $176,100) | $21,836 |
| Medicare tax (2.9% on $184,700) | $5,356 |
| Additional Medicare tax (0.9% on amount over $200K AGI) | ~$0 |
| Total SE tax | $27,192 |
S-Corp (with $80,000 salary)
| Item | Amount |
|---|---|
| Net profit | $200,000 |
| W-2 salary | $80,000 |
| Employer payroll taxes (7.65%) | $6,120 |
| Employee payroll taxes (7.65%) | $6,120 |
| Total payroll taxes | $12,240 |
| Shareholder distribution | $113,880 ($200K - $80K - $6,120 employer taxes) |
Tax Savings at $200K
| LLC | S-Corp | Difference | |
|---|---|---|---|
| Payroll/SE tax | $27,192 | $12,240 | $14,952 saved |
After $3,000-$5,000 in compliance costs, the net savings are roughly $10,000-$12,000 per year. That is a meaningful number.
The QBI Deduction Interaction
Both LLCs and S-Corps can qualify for the Section 199A Qualified Business Income (QBI) deduction---up to 20% of qualified business income. But the calculation differs:
- LLC: QBI = net profit minus half of SE tax. The deduction is 20% of that amount.
- S-Corp: QBI = net profit minus your W-2 salary. The deduction is 20% of that amount.
A higher S-Corp salary reduces your payroll tax but also reduces your QBI deduction. The optimal salary balances both.
Example at $100,000 net profit:
| LLC | S-Corp ($60K salary) | |
|---|---|---|
| QBI base | $92,935 | $40,000 |
| QBI deduction (20%) | $18,587 | $8,000 |
| Income tax savings (24% bracket) | $4,461 | $1,920 |
The LLC gets a $2,541 larger QBI deduction benefit. You must weigh this against the $4,950 in payroll tax savings. At $100K, the S-Corp still wins---but the margin narrows.
For service businesses (law, consulting, medical, accounting), the QBI deduction begins to phase out at $191,950 (single) / $383,900 (MFJ) in 2025. See our QBI deduction optimization guide for the full analysis.
When the S-Corp Election Makes Sense
The S-Corp election is generally worth it when:
- Net profit consistently exceeds $60,000+ (enough savings to justify compliance costs)
- You can justify a reasonable salary that is meaningfully lower than total profit
- Your income is below the Social Security wage base ($176,100 in 2025 / $183,000 in 2026), where payroll tax savings are highest
- You are already keeping clean books and paying for business tax preparation
When the LLC Default Is Better
Stay with the default LLC taxation when:
- Net profit is under $40,000-$50,000 --- compliance costs eat the savings
- Profits fluctuate wildly --- in low-profit years, you still incur S-Corp costs
- You are a brand-new business --- wait until income stabilizes before adding complexity
- You need to retain earnings --- S-Corps cannot have multiple classes of stock, and accumulated earnings may trigger issues
- State fees are high --- California charges an $800 minimum franchise tax for LLCs and S-Corps, plus some states impose additional S-Corp taxes
Costs of S-Corp Compliance
The tax savings sound great, but S-Corps require more administrative work:
| Compliance Item | Typical Annual Cost |
|---|---|
| Payroll service (Gusto, ADP, etc.) | $500 - $1,500 |
| Form 1120-S tax return preparation | $1,000 - $3,000 |
| State franchise tax / filing fees | $0 - $800+ |
| Bookkeeping (if not already doing it) | $1,200 - $3,600 |
| Quarterly payroll tax filings (Form 941) | Included in payroll service |
| Year-end W-2 and K-1 issuance | Included in payroll/tax prep |
Realistic total: $2,000-$5,000 per year in additional costs compared to a Schedule C sole proprietorship.
LLC Flexibility Advantages
Beyond taxes, the default LLC structure has practical advantages:
- Simpler filing: Schedule C attaches to your 1040. No separate business return.
- No payroll requirements: No need to run payroll, file quarterly 941s, or issue W-2s.
- Easier retirement contributions: Solo 401(k) and SEP IRA contributions are based on net self-employment income. No payroll needed.
- Lower professional fees: A Schedule C costs far less to prepare than a Form 1120-S + personal return.
- Multi-member flexibility: LLCs can allocate profits and losses flexibly among members. S-Corps must distribute proportional to ownership.
Decision Framework
Use this decision tree:
- Is your net profit consistently above $60,000? If no, stick with LLC.
- Can you justify a salary at least $20,000-$30,000 below net profit? If no, savings are too small.
- Are you already paying for bookkeeping and tax preparation? If yes, the incremental S-Corp cost is lower.
- Are you in a high-tax state with extra S-Corp fees? Factor that in.
- Is your income stable year to year? If it fluctuates, the LLC default is simpler.
If you answered yes to #1, #2, and #3, the S-Corp election likely saves you money. Run the numbers at your specific income level.
How to Make the S-Corp Election
- File Form 2553 with the IRS. The deadline is 2 months and 15 days after the start of the tax year (March 15 for calendar-year filers).
- Set up payroll through a provider like Gusto, ADP, or your accountant.
- Determine reasonable compensation using salary data for your role and industry.
- Start paying yourself W-2 wages on a regular schedule (monthly or semi-monthly).
- File Form 1120-S by March 15 of the following year (or request an extension).
Late elections are possible with reasonable cause relief, but it is much easier to file on time.
Related Guides
- S-Corp Tax Strategies --- Payroll tax optimization and compliance
- S-Corp Reasonable Compensation --- How to set your salary without triggering an audit
- LLC Taxes Explained --- Default LLC taxation and election options
- Best Business Structure for Taxes --- Sole prop, LLC, S-Corp, C-Corp compared
- Self-Employment Tax Explained --- The 15.3% tax and how to reduce it
- QBI Deduction & S-Corp Optimization --- Balancing salary and the 20% deduction
How sharper.tax Helps
sharper.tax analyzes your uploaded tax return to compare your current business structure against alternatives. We model the payroll tax savings of an S-Corp election at your specific income level, factor in the QBI deduction interaction, and estimate compliance costs so you see the true net benefit. sharper.tax exists to make sophisticated tax planning available to everyone for free.
Sources
- IRS Form 2553 Instructions (S Corporation Election)
- IRS: S Corporations
- IRS: Self-Employment Tax
- IRS: Paying Yourself (S Corporation)
The information above is educational and not tax advice.