LLC vs S Corp: Which Saves You More on Taxes?

By Priya Raman, Contributing Writer, Policy & Regulation
Updated July 2, 2026

An LLC and an S corp are not competing choices. An LLC is a state-level legal entity. An S corp is a federal tax election. You can be both at the same time. For most small business owners the real question is whether the tax savings from an S corp election outweigh the added payroll and accounting costs, and the answer almost always depends on how much net profit the business generates each year.

How an LLC Is Taxed by Default

When you form a single-member LLC and take no additional steps, the IRS disregards the LLC as a separate tax entity. All profit flows to your personal return on Schedule C. Two taxes apply to that profit:

• Ordinary income tax at your personal federal rate.
• Self-employment tax of 15.3 percent on the first $176,100 of net profit (2025 threshold) and 2.9 percent above that. This covers Social Security and Medicare contributions for self-employed individuals.

The self-employment tax is where people feel it. On $100,000 of net profit, you owe roughly $15,300 in self-employment tax before ordinary income tax enters the picture. Every dollar of net profit gets hit under default single-member LLC treatment.

A multi-member LLC follows the same pass-through logic but files a partnership return (Form 1065) and sends each member a Schedule K-1 showing their share of income and any deductions.

The IRS overview of LLC taxation covers default classification rules and the election options available to LLCs.

How an LLC Taxed as an S Corp Works

When your LLC files Form 2553 to elect S corp status with the IRS, the tax structure changes in one important way: you split your income into two buckets.

1. Reasonable salary paid to yourself as a W-2 employee. Payroll taxes (the employer and employee share of Social Security and Medicare) apply to this portion only.
2. Distributions of remaining profit passed through to your personal return. Distributions are not subject to self-employment tax or payroll tax.

The IRS requires owner-employees of S corps to pay themselves a reasonable salary for the work they actually do in the business. This is not optional. The IRS scrutinizes S corps that pay little or no salary while distributing most income, and courts have consistently sided with the IRS on reclassification. Reasonable salary is roughly what you would pay someone else to do your job. Bureau of Labor Statistics wage data and industry benchmarks provide defensible reference points; a CPA can help you set an amount that holds up.

Suppose your LLC nets $120,000 and you set a $60,000 reasonable salary. Under default LLC treatment, self-employment tax hits all $120,000. Under S corp treatment, payroll taxes apply only to the $60,000 salary. The remaining $60,000 in distributions clears that 15.3 percent hurdle, for a rough saving of around $9,000 before factoring in payroll costs. The IRS guidance on S corporations covers eligibility and filing requirements.

When Does the S Corp Election Actually Save Money?

The S corp election adds real ongoing costs: payroll processing, tighter bookkeeping, and a separate business tax return (Form 1120-S). Those costs eat directly into the tax savings. That is why the election does not make financial sense at every income level.

Most CPAs put the breakeven somewhere between $40,000 and $80,000 in net profit per year, varying by state, reasonable salary, and what you pay for payroll and accounting. Below that range, the administrative costs regularly exceed the tax savings. Above it, the math usually favors electing.

A rough estimate: take 15.3 percent of the difference between your total net profit and your reasonable salary. That is your gross payroll tax saving. Subtract what you will spend on payroll software, a payroll service, and the extra CPA bill for Form 1120-S. If the net is positive by a comfortable margin, the election is probably worth it. The free LLC cost calculator can help you model first-year costs before committing.

The Extra Costs and Paperwork of an S Corp

Electing S corp status carries ongoing obligations worth understanding before you file Form 2553.

• Payroll. You must run payroll for yourself, withhold federal and state payroll taxes, deposit those taxes on schedule, and file quarterly payroll returns (Form 941) and an annual W-2. Payroll software for a single-employee setup typically runs $50 to $150 per month.
• Form 1120-S. Your S corp files its own federal return each year, due March 15. This is separate from your personal return and typically adds $500 to $1,500 or more to your annual tax preparation bill.
• State-level requirements. Many states charge an annual S corp fee or franchise tax. Some states do not recognize the federal S corp election at all, meaning you pay state taxes as a standard LLC regardless. Confirm your state's rules before assuming the savings apply statewide.
• More bookkeeping. Separating salary from distributions, tracking payroll tax deposits, and reconciling payroll accounts requires cleaner bookkeeping than a simple single-member LLC.

How to Elect S Corp Status (Form 2553)

To elect S corp taxation for your LLC, file Form 2553 with the IRS. A few things to know before you do:

• Your LLC must meet S corp eligibility rules: no more than 100 shareholders, only one class of stock, and all shareholders must be U.S. citizens or permanent residents.
• The election must be filed no later than two months and 15 days after the start of the tax year you want it to take effect, or at any time during the prior tax year.
• Late elections may be accepted under IRS relief procedures in some cases, but timely filing is the cleanest path.
• Some states require a separate state-level S corp election in addition to the federal Form 2553.

LLC vs LLC Taxed as S Corp: Side by Side

Which Should You Choose?

Stay with default LLC taxation if net profit is below $40,000 to $50,000, you want simple overhead, your income swings year to year, or your state imposes fees that shrink the benefit.

Consider electing if net profit consistently clears $50,000 to $80,000, income is stable, a CPA has confirmed the math in your specific state, and you are ready for payroll and tighter bookkeeping.

The election is not permanent. You can revoke it, though re-electing within five years comes with IRS restrictions. Starting with default LLC taxation and switching when the income justifies it is a common path. The SBA guide to choosing a business structure is a useful companion when working through this decision.

Related reading

• Every LLC needs a registered agent. Here is what they do, whether you can be your own, and when a professional service is worth the cost.
• LLC vs corporation: how they differ on taxes, ownership, liability, and compliance, so you can choose the right structure for your business.
• LLC vs sole proprietorship: the liability, tax, and cost differences, and when it is worth moving off sole proprietor status.