S Corp vs LLC: Taxes, Costs, and When to Elect (2026)

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

An LLC is a legal entity; an S corp is a tax election. Keep a default LLC for simple pass-through taxation; elect S corp status on Form 2553 to trim the 15.3% self-employment tax once profits justify payroll.

Because they are not the same category of thing, "S corp vs LLC" is often a false choice: a limited liability company (LLC) is a state-law business structure, while an S corporation is a federal tax status an eligible entity elects - and an LLC can elect it while staying an LLC. The real decision is how you want profits taxed and how much administrative work you will take on.

S Corp vs LLC: Side-by-Side Comparison

The table compares a default-taxed LLC with an entity that has elected S corporation treatment. Entries reflect federal rules; state fees are separate and figures are effective for the 2026 tax year unless noted.

LLC and S Corp Are Not the Same Kind of Thing

A limited liability company is "a business structure authorized by state law," with owners called members, per the IRS LLC overview. Forming one is a state act: you file articles of organization with a secretary of state and gain a liability shield between the business and your personal assets - see how to form an LLC.

An S corporation is different. The IRS defines S corporations as "corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes." Statutorily, one is "a small business corporation for which an election under section 1362(a) is in effect," under 26 U.S. Code § 1361. The SBA puts it plainly: S corp status "is a tax classification applied to an existing business entity rather than a business structure itself." An LLC, partnership, or corporation can hold it; the entity underneath does not disappear.

How Each Is Taxed by Default

An LLC's default federal tax treatment depends on its member count. Per the IRS, "an LLC with only one member is treated as an entity disregarded as separate from its owner," and "a domestic LLC with at least two members is classified as a partnership for federal income tax purposes," unless it files Form 8832. A single-member LLC's income lands on the owner's Schedule C; a multi-member LLC files Form 1065 and issues a Schedule K-1 to each member.

Under any default LLC treatment, the member is self-employed. The SBA notes LLC members "must pay self-employment taxes for Medicare and Social Security." That self-employment 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 states the first $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 when net earnings reach $400 or more.

An S corporation is a pass-through too, but differently. Under 26 U.S. Code § 1366, each shareholder reports "the shareholder's pro rata share" of income and loss, with deductible losses limited to basis in stock plus loans. The entity files Form 1120-S, "U.S. Income Tax Return for an S Corporation," and issues a Schedule K-1 to each owner, per the IRS Form 1120-S page - and can still owe entity-level tax "on certain built-in gains and passive income."

When a Default LLC Is the Better Fit

A default-taxed LLC tends to fit when an S election's savings would not cover its extra cost, or when S corp eligibility rules get in the way. Consider default LLC taxation when several of these are true:

• Profit is modest, uneven, or absent. The savings come only from profit above a reasonable salary; if little remains, they can be smaller than payroll and accounting fees.
• You want the simplest compliance. A single-member LLC often files no separate federal return; an S corp must file Form 1120-S yearly and run payroll.
• You need flexible or ineligible ownership. Per the IRS, LLC members "may include individuals, corporations, other LLCs and foreign entities"; an S corporation cannot.
• You want flexible profit splits. An LLC taxed as a partnership can allocate profits disproportionately; an S corporation must allocate pro rata with one class of stock.

Keeping default taxation forfeits nothing permanently: you can elect S corp status later when profit grows, subject to the filing deadline. Many owners start with a default LLC and an operating agreement, then revisit the math.

When an S Corp Election Makes Sense

An S corp election tends to make sense when consistent profit exceeds a reasonable salary by enough that self-employment-tax savings outweigh payroll and filing costs. It is most often considered when:

• Net profit is well above a reasonable salary. The savings apply only to the distribution portion; the larger and more predictable that surplus, the larger the savings.
• The business can afford payroll. Running payroll and preparing Form 1120-S usually means paying a provider or accountant less than the tax saved.
• Owners meet S corp eligibility. US individuals (or certain trusts and estates), no more than 100, with one class of stock.
• The owner performs the services personally, as a shareholder-employee who takes a salary plus distributions.

Because the numbers turn on your profit, reasonable salary, and state, run this calculation with a CPA; no fixed profit threshold in the Internal Revenue Code makes an S election automatically worthwhile.

How the Self-Employment Tax Savings Work

The savings come from splitting the owner's pay in two. As a default LLC member, your entire net profit is generally subject to the 15.3% self-employment tax described by the IRS. As an S corporation shareholder-employee, only your salary carries the equivalent 15.3% in FICA; profit taken as a distribution is generally not subject to self-employment or FICA tax.

The salary cannot be set artificially low. The IRS rule for S corporation officers is that the definition of an employee "includes corporate officers," so "payments to the corporate officer are treated as wages"; a shareholder with a right to cash or property must be paid "an appropriate and reasonable salary." The IRS compensation guidance adds that officer wages should be "commensurate with your duties," and courts have repeatedly reclassified low-wage-plus-large-distribution arrangements as wages. So the S corp saves tax only on distributions above a defensible salary - not the whole profit - and a too-low salary invites back taxes and penalties.

How to Elect S Corp Status (Form 2553)

Electing S corp treatment is a single IRS filing, not a re-formation. An eligible entity files Form 2553, "Election by a Small Business Corporation," under section 1362(a); an LLC seeking S corp taxation generally files it directly, and a separate Form 8832, "Entity Classification Election," lets an eligible entity choose corporate treatment. All shareholders must consent - 26 U.S. Code § 1362 makes an election "valid only if all persons who are shareholders" on the day it is made consent.

The timing is strict. Per the Instructions for Form 2553, file "no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding" it - for a calendar-year business, an election effective January 1 is generally due by March 15. Missing it is not always fatal: the instructions provide late relief under Rev. Proc. 2013-30 if the entity requests it "within 3 years and 75 days of the effective date entered on line E of Form 2553" and shows reasonable cause.

Once the election is in effect, the entity files Form 1120-S by the 15th day of the 3rd month after year end - March 15 for calendar-year filers - with a six-month extension on Form 7004, per the Form 1120-S instructions. A late Form 1120-S carries a penalty of $255 per shareholder per month, up to 12 months, for the 2026 tax year. You will also want an EIN before running payroll.

How to Switch or Revoke the Election

Switching is a tax-status change, not a new company. To move from a default LLC to S corp taxation, file Form 2553 within the deadline above; the LLC keeps its name, EIN, operating agreement, and registered agent. To reverse it, revoke the election: under 26 U.S. Code § 1362, shareholders holding "more than one-half of the shares of stock" may revoke, effective January 1 if made by mid-March, otherwise the following January 1. An election also terminates automatically if the entity stops meeting the requirements, after which the IRS generally bars re-electing for five years without consent.

Eligibility Limits for S Corporations

Not every entity can hold S corporation status, and an LLC does not escape these limits by electing. To qualify as a "small business corporation," per the IRS and 26 U.S. Code § 1361(b), an entity must:

• Be a domestic entity - "a domestic corporation" (or eligible domestic entity electing corporate treatment) that is "not an ineligible corporation."
• Have no more than 100 shareholders. The statute prohibits "more than 100 shareholders."
• Have only allowable owners - individuals, certain trusts, and estates. It "may not be partnerships, corporations or non-resident alien shareholders," per the IRS.
• Have only one class of stock, which prevents the flexible profit splits an LLC taxed as a partnership allows.

Certain financial institutions, insurance companies, and domestic international sales corporations are "ineligible corporations" that cannot elect at all - one reason some owners compare S corp vs C corp, since a C corporation has no shareholder cap and can issue multiple stock classes, at the cost of entity-level tax.

Common Mistakes to Avoid

• Treating it as an either/or. An LLC can elect S corp taxation; you rarely have to give up the LLC to get S corp tax treatment.
• Setting the salary too low. The IRS requires "reasonable" wages before distributions and can recharacterize distributions as wages, with back taxes and penalties.
• Missing the Form 2553 deadline, generally 2 months and 15 days into the tax year, which forces reliance on Rev. Proc. 2013-30 relief.
• Electing with no meaningful profit, so payroll and Form 1120-S costs exceed any self-employment-tax savings.
• Breaking an eligibility rule - a 101st shareholder, a partnership or corporate owner, a nonresident alien, or a second class of stock can terminate the election.
• Forgetting the annual return. An S corp must file Form 1120-S each year; a default single-member LLC often files none separately.

Frequently Asked Questions

Is an S corp better than an LLC?

Neither is universally better. They are not the same kind of thing: an LLC is a legal entity, an S corp is a federal tax election, and an LLC can elect S corp taxation on Form 2553. The election can lower self-employment tax but adds payroll and a Form 1120-S return.

Can an LLC be taxed as an S corp?

Yes. An eligible LLC can elect S corporation tax treatment by filing IRS Form 2553. The LLC keeps its state-law status and liability shield; only its federal tax classification changes.

How does an S corp save on self-employment tax?

A default LLC member pays 15.3% self-employment tax on net earnings. An S corp instead pays the owner-employee a reasonable salary subject to FICA; profit distributions beyond that salary are generally not subject to self-employment or FICA tax.

What is the deadline to elect S corp status?

File Form 2553 no more than 2 months and 15 days after the start of the tax year, or during the prior tax year. Missed deadlines may qualify for late relief under Rev. Proc. 2013-30 within 3 years and 75 days.

What are the S corp eligibility limits?

An S corporation must be domestic, have no more than 100 shareholders, have one class of stock, and have only allowable owners - individuals, certain trusts, and estates. Partnerships, corporations, and nonresident aliens cannot be shareholders.

Does an S corp have to run payroll?

Effectively yes. The IRS treats a shareholder who performs services as an employee and requires reasonable wages through payroll and subject to FICA before distributions. That payroll and the Form 1120-S return add cost a default LLC avoids.

Related

• What is an LLC?
• How to form an LLC (cluster hub)
• Form 2553 explained
• Self-employment tax, explained
• LLC vs corporation (paired)
• S corp vs C corp (paired)

Sources

1. IRS - S Corporations (definition, eligibility, one class of stock).
2. IRS - Limited Liability Company (LLC) (default classification, Form 8832).
3. IRS - About Form 2553 (election title).
4. IRS - Instructions for Form 2553 (deadline; Rev. Proc. 2013-30 relief).
5. IRS - About Form 8832, Entity Classification Election.
6. IRS - About Form 1120-S (return title, Schedule K-1).
7. IRS - Instructions for Form 1120-S (March 15 due date, late penalty).
8. IRS - Self-Employment Tax (15.3% = 12.4% + 2.9%; $168,600 for 2024; 0.9%; $400).
9. IRS - S Corporation Employees, Shareholders and Corporate Officers (reasonable salary).
10. IRS - Paying Yourself (officer wages).
11. SBA - Choose a Business Structure (LLC vs S corp).
12. Cornell LII - 26 U.S. Code § 1361 (small business corporation limits).
13. Cornell LII - 26 U.S. Code § 1362 (election timing, consent, revocation).
14. Cornell LII - 26 U.S. Code § 1366 (pass-through; basis limit).

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. Whether an S-corp election fits a business depends on facts this page cannot assess. Verify with the IRS before acting.