Updated June 17, 2026
An LLC and an S corp are not competing choices. An LLC is a state-level legal entity, while an S corp is a federal tax election. You can form an LLC and then elect S corp tax treatment with the IRS. 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 that math usually depends on how much net profit your 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 the painful part. On $100,000 of net profit, you owe roughly $15,300 in self-employment tax before income tax is even calculated. That tax applies to every dollar of net profit under default single-member LLC treatment.
A multi-member LLC follows the same pass-through logic but files a partnership return (Form 1065) and issues each member a Schedule K-1 reflecting their share of income.
The IRS overview of LLC taxation covers the default classification rules and the 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.
- 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.
- 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 perform in the business. This is a real legal requirement, not optional. The IRS scrutinizes S corps that pay no salary or a suspiciously low salary while taking all income as distributions. Reasonable salary is generally what you would pay an arm's-length employee to perform your role. Bureau of Labor Statistics wage data and industry benchmarks are useful reference points. A CPA can help you arrive at a defensible figure.
Suppose your LLC nets $120,000 and you set a $60,000 reasonable salary. Under default LLC taxation, self-employment tax applies to all $120,000. Under S corp taxation, payroll taxes apply only to the $60,000 salary. The remaining $60,000 in distributions avoids that 15.3 percent hit -- a rough saving of around $9,000 before accounting for the costs of running S corp payroll. See the IRS guidance on S corporations for eligibility rules and filing requirements.
When Does the S Corp Election Actually Save Money?
The S corp election adds real ongoing costs: payroll processing, additional bookkeeping, and a separate business tax return (Form 1120-S). Those costs eat into the tax savings. This is why the election does not make financial sense at every income level.
Most CPAs suggest the S corp election starts to make sense somewhere between $40,000 and $80,000 in net profit per year, depending on your state, your reasonable salary, and what you pay for payroll and accounting. Below that range, the administrative costs often exceed the tax savings. Above it, the math usually favors electing S corp status.
A simple way to estimate your breakeven: calculate the payroll tax savings (15.3 percent multiplied by the difference between your total net profit and your reasonable salary), then subtract your added annual costs for payroll software, a payroll service, and any extra CPA fees for the S corp return. If the savings exceed the costs by a comfortable margin, the election is likely worth it. Use our free LLC cost calculator to model your estimated first-year costs before making this decision.
The Extra Costs and Paperwork of an S Corp
Electing S corp status is not free. Here is what you are taking on:
- 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 have your LLC taxed as an S corp, file Form 2553 with the IRS. Key details:
- 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
| Feature | LLC (Default) | LLC Taxed as S Corp |
|---|---|---|
| Self-employment tax | On all net profit | On salary only |
| Payroll required | No | Yes, owner must take reasonable salary |
| Annual tax return | Schedule C or Form 1065 | Form 1120-S plus personal return |
| Compliance cost | Lower | Higher (payroll plus S corp return) |
| Best for | Lower profit, early stage, simplicity | Stable profit roughly $50k or more |
Which Should You Choose?
Stay with default LLC taxation if your net profit is below $40,000 to $50,000 per year, you value simplicity and low overhead, your income is variable, or your state imposes high S corp fees that reduce the savings.
Consider the S corp election if your net profit consistently exceeds $50,000 to $80,000 per year, your income is stable and predictable, you have already worked with a CPA to confirm the math in your specific state, and you are prepared to take on payroll and bookkeeping obligations.
The election is not permanent. You can revoke it later, though there are restrictions on re-electing within five years. Starting with default LLC taxation and switching when your income justifies it is a common and sensible path. The SBA guide to choosing a business structure is a good companion resource when thinking through this decision.