LLC vs S Corp: How Taxes Differ (2026)

Fact-checked by the LegalGlass editorial team against primary sources · Published Aug 6, 2026 · Last updated Aug 6, 2026

A default LLC pays 15.3% self-employment tax on all net earnings; an S corp taxes only a reasonable salary and generally exempts distributions. Choose a default LLC for simplicity; choose the S corp election if the savings beat the payroll and Form 1120-S cost.

The tax difference between an LLC and an S corp is not about income tax - both are pass-through, so business profit is taxed once on the owners' returns. The difference is in employment tax: how much of the profit is exposed to the 15.3% Social Security and Medicare tax. A default LLC exposes all of it; an S corp exposes only a reasonable salary. That single distinction drives the entire "should I elect S corp" question.

Quick Answer

Income tax: Both pass-through; profit taxed once on owners' returns
Default LLC employment tax: 15.3% self-employment tax on all net earnings
S corp employment tax: FICA on a reasonable salary only; distributions generally exempt
Where savings come from: Profit taken as distributions above a reasonable salary
Added S corp cost: Payroll for the owner plus an annual Form 1120-S return
How to elect: File IRS Form 2553; deadline 2 months and 15 days into the tax year

LLC vs S Corp Taxes: Side-by-Side

The table compares a default-taxed LLC with the same LLC (or a corporation) after an S corp election. Both are pass-through for income tax; the difference is employment tax and filing. Figures are federal and effective for the 2026 tax year unless noted.

Tax factor	LLC (default taxation)	S corporation (elected)
Income tax	Pass-through to owner	Pass-through to shareholder
Employment tax base	All net earnings (15.3% SE tax)	Reasonable salary only (FICA)
Distributions	Included in SE-taxed net earnings	Generally not subject to SE or FICA tax
Owner payroll	None	Required for a working owner
Federal return	Schedule C or Form 1065	Form 1120-S plus Schedule K-1
Late-return penalty	Form 1065: per-partner monthly penalty	Form 1120-S: $255 per shareholder per month, up to 12 months
Owner tax reporting	Schedule SE for SE tax	W-2 wages plus K-1 income
To adopt	Default	File Form 2553

How a Default LLC Is Taxed

A default LLC's income tax depends on member count, but the employment tax is the same idea in both cases: the owner is self-employed on the whole profit. Per the IRS, "an LLC with only one member is treated as an entity disregarded as separate from its owner," reporting income on Schedule C (Form 1040) - used "to report income or loss from a business you operated … as a sole proprietor" - while "a domestic LLC with at least two members is classified as a partnership," filing Form 1065 and issuing Schedule K-1s. Either way the member's share of net earnings from the business is subject to self-employment tax.

That tax is 15.3% - "12.4% for social security" plus "2.9% for Medicare," per the IRS. The 12.4% Social Security portion applies only up to an annually adjusted wage base - the IRS lists $168,600 of combined wages and net earnings for 2024 - while the 2.9% Medicare portion has no cap. An additional 0.9% Medicare tax applies above $250,000 (married filing jointly) or $125,000 (married filing separately), and self-employment tax applies once net earnings reach $400. The owner computes it on Schedule SE (Form 1040), which the IRS says is used "to figure the tax due on net earnings from self-employment," and can deduct one-half of the tax.

How an S Corp Is Taxed

An S corporation is a pass-through for income tax too, but it changes the employment-tax base. The IRS defines S corporations as entities that "pass corporate income, losses, deductions, and credits through to their shareholders," so business profit is still taxed once on the owner's return. What changes is that an owner who works in the business is treated as an employee. The IRS rule for S corporation officers states the definition of employee "includes corporate officers," so "payments to the corporate officer are treated as wages" - a shareholder-employee must receive "an appropriate and reasonable salary" subject to FICA. The IRS guidance on paying yourself adds that officer wages should be "commensurate with your duties."

Profit distributed beyond that salary is generally not subject to self-employment or FICA tax. So instead of 15.3% on the entire profit, employment tax hits only the salary. Under 26 U.S. Code § 1366, each shareholder still reports "the shareholder's pro rata share" of the corporation's income for income-tax purposes. The catch is that the salary must be defensible: the IRS can recharacterize a low-salary-plus-large-distribution setup as wages, with back payroll tax and penalties. The entity files Form 1120-S and issues a Schedule K-1 to each owner. See how the whole trade-off nets out in LLC or S corp: which is better?

A Worked Example

Consider an owner-operated business with $120,000 of net profit and a reasonable salary of $60,000 for the work performed. This is an illustration of the mechanics, not tax advice or a prediction for any specific business.

As a default LLC: the full $120,000 of net earnings is subject to the 15.3% self-employment tax described by the IRS, before income tax.
As an S corp: only the $60,000 reasonable salary carries the equivalent 15.3% in FICA; the remaining $60,000 taken as a distribution is generally not subject to self-employment or FICA tax.

The employment-tax base shrinks from $120,000 to $60,000, so the saving applies to that $60,000 distribution. Against that saving, weigh the cost of running payroll on the $60,000 salary and preparing Form 1120-S. If the profit had been only $30,000 - below or near a reasonable salary - there would be little distribution to exempt, and the payroll and filing costs could swamp any saving. That is why the same election helps one business and hurts another. Estimate your own figures with the self-employment tax calculator.

Note what does not change. Because both a default LLC and an S corp are pass-through for income tax, the same business profit lands on the owner's individual return and is taxed at the same income-tax brackets either way; only the employment-tax base and the return you file differ. The S corp does not lower income tax - it narrows the slice of profit exposed to the 15.3% Social Security and Medicare tax described by the IRS. That is why the analysis is entirely about the reasonable salary, the distribution above it, and the cost of the payroll and Form 1120-S machinery needed to support it.

The Added Cost of the S Corp: Payroll and Form 1120-S

The S corp saving is not free. Because a working owner must be paid a reasonable salary, the business runs payroll - withholding, federal deposits, and quarterly and annual payroll returns - for at least one employee, usually through a paid provider. It also files Form 1120-S each year instead of a simple Schedule C. Those are real, recurring costs a default single-member LLC avoids entirely.

Missing the return is expensive. Per the Instructions for Form 1120-S, the S corp return is due by the 15th day of the 3rd month after year end - March 15 for calendar-year filers - with an automatic six-month extension on Form 7004, which the IRS says is used to "request an automatic 6-month extension of time to file certain business income tax … returns." A late Form 1120-S carries a penalty of $255 per shareholder per month, up to 12 months, for the 2026 tax year. Budget for the payroll service, the return, and the bookkeeping the election requires before assuming it saves money.

These costs are largely fixed, while the saving scales with profit. Payroll processing, the Form 1120-S, and the extra bookkeeping cost roughly the same whether the business nets $40,000 or $200,000, but the self-employment-tax saving grows only as the distribution above a reasonable salary grows. That is why a higher, steadier profit tips the math toward the election, and a thin or erratic profit tips it back toward a plain Schedule C LLC.

How to Elect S Corp Taxation

Electing S corp taxation is a single IRS filing, not a new company. An eligible entity - a single-member LLC, a multi-member LLC, or a corporation - files Form 2553, "Election by a Small Business Corporation." The IRS requires the form to be "signed by all the shareholders." Timing is strict: file no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or during the prior tax year - generally March 15 for a calendar-year election effective January 1. Late filers may qualify for relief under Rev. Proc. 2013-30 within 3 years and 75 days of the effective date; details are in Form 2553 explained.

Once the election is in effect, the entity runs payroll for any working owner and files Form 1120-S each year. It keeps the same EIN and name. Confirm your new payroll and deposit obligations and set up a payroll process before the first salary payment.

Timing the switch matters for the math. Because the election generally takes effect at the start of a tax year, the self-employment-tax savings apply only to profit earned while the election is in force - a mid-year filing for the following year does not retroactively convert the current year's earnings. The IRS requires Form 2553 to be "signed by all the shareholders," so a multi-owner LLC needs every member's consent. And because a working owner must draw a reasonable salary from the first year the election applies, budget the payroll and Form 1120-S costs into that year's plan rather than assuming the saving arrives cost-free.

Common Mistakes to Avoid

Electing with little profit. Below a reasonable salary there is little distribution to exempt, so payroll and Form 1120-S costs can exceed the saving.
Setting the salary too low. The IRS requires reasonable wages before distributions and can recharacterize distributions as wages, with back taxes and penalties.
Assuming income tax changes. Both an LLC and an S corp are pass-through for income tax; only the employment-tax base and filing differ.
Missing the Form 2553 deadline, generally 2 months and 15 days into the tax year, forcing reliance on Rev. Proc. 2013-30 relief.
Forgetting the $255-per-shareholder-per-month penalty for a late Form 1120-S, up to 12 months.
Ignoring state payroll and tax rules, which can add cost the federal saving does not account for.

Frequently Asked Questions

How is an LLC taxed differently from an S corp?

A default LLC member is self-employed and pays 15.3% self-employment tax on all net earnings. Under an S corp election, the owner takes a reasonable salary subject to FICA, and profit distributions above that salary are generally not subject to self-employment or FICA tax. Both are pass-through for income tax.

Does an S corp really save on taxes?

It can, but only on distributions above a reasonable salary, and only if the savings beat the added cost of payroll and the Form 1120-S return. When net profit is modest, those costs can outweigh the self-employment-tax savings, so the election is not automatically worthwhile.

What is the self-employment tax rate for an LLC?

15.3% total: 12.4% for Social Security plus 2.9% for Medicare, per the IRS. The 12.4% Social Security portion applies only up to an annual wage base, while the 2.9% Medicare portion has no cap. Self-employment tax applies once net earnings reach $400.

What extra costs does an S corp have?

An S corp must run payroll for any owner who performs services and file Form 1120-S each year with a Schedule K-1 to each owner. A late Form 1120-S carries a penalty of $255 per shareholder per month, up to 12 months, for the 2026 tax year.

Can a single-member LLC elect S corp taxation?

Yes. A single-member LLC that meets the eligibility rules can elect S corporation tax treatment by filing IRS Form 2553. It then runs payroll for the owner and files Form 1120-S, instead of reporting profit on Schedule C as a default disregarded entity.

How much profit makes an S corp worth it?

There is no fixed threshold in the Internal Revenue Code. The election tends to help when profit reliably exceeds a reasonable salary by enough that self-employment-tax savings on the distribution portion outweigh payroll and Form 1120-S costs. Run the numbers with a CPA.

Sources

IRS - Self-Employment Tax (15.3% = 12.4% + 2.9%; $168,600 for 2024; 0.9%; $400).
IRS - Limited Liability Company (LLC) (disregarded entity / partnership default).
IRS - S Corporations (pass-through definition; Form 2553 signed by all shareholders).
IRS - S Corporation Employees, Shareholders and Corporate Officers (reasonable salary; wages).
IRS - About Form 2553 (election by a small business corporation).
IRS - About Form 1120-S (S corporation return; Schedule K-1).
IRS - Instructions for Form 1120-S (March 15 due date; $255 per-shareholder late penalty).
IRS - Paying Yourself (officer wages commensurate with duties).
IRS - About Schedule SE (Form 1040) (figures self-employment tax; half deductible).
IRS - About Schedule C (Form 1040) (sole-proprietor / disregarded-entity profit).
IRS - About Form 1065 (multi-member LLC partnership return).
IRS - About Form 7004 (automatic 6-month filing extension).
Cornell LII - 26 U.S. Code § 1366 (pass-through of pro rata share to shareholders).

LegalGlass provides general information for educational purposes and is not a law firm or a substitute for advice from a licensed attorney or tax professional. The example above is illustrative; whether an S corp election saves tax depends on facts this page cannot assess, including your profit, reasonable salary, and state. Verify with the IRS and a CPA before acting.