LLC vs S Corp: What Is the Difference and Which Saves More Tax?

The LLC vs S corp question usually comes up in the year your LLC starts to show real profit. A friend or an online ad says switching to an S corp could cut your taxes. That can be right, but only for some owners, and a wrong choice costs money either way.

An LLC and an S corp aren't two rival kinds of company. An LLC is a company you form with a state. An S corp is a way of being taxed that you choose with the IRS. So an eligible LLC can keep its default tax treatment or elect S corp taxation by filing Form 2553.

S corp status can lower self-employment tax, but it adds payroll and extra filings. It usually pays off only when profit is steady and high enough to cover those costs. If you live outside the US, eligibility usually settles the question before any math starts.

This article explains general federal rules and two state examples, so check your own figures with an accountant.

LLC vs S corp on one page

Before you compare savings, it helps to see what you'd actually be choosing between. Both columns can describe the same LLC. Only the tax treatment changes.

The ownership row is the one many owners skip. S corp shareholders can be individuals, certain trusts and estates. Partnerships, corporations and nonresident aliens can't be shareholders.

Where you are now: how your LLC is taxed by default

Start with the tax bill you already pay. The IRS classifies an LLC by the number of its members. If you're the only member, the LLC is "disregarded" for income tax. That means its profit is reported as part of your own return.

An LLC with two or more members is treated as a partnership, and each member reports a share of the profit. For employment taxes, the IRS still treats a single-member LLC as a separate entity. That matters once you hire staff.

The 15.3% line on your return

When you look at last year's return, one line probably stands out. That's self-employment tax, the way people who work for themselves pay Social Security and Medicare. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. It applies when net self-employment earnings reach $400 or more.

Three details lower the bill:

• The tax is calculated on 92.35% of net profit, not the full amount.
• The Social Security part stops at an annual cap called the wage base. The Medicare part has no cap.
• You can deduct the employer-equivalent part of self-employment tax when you work out adjusted gross income.

The Social Security Administration sets the wage base at $184,500 for 2026. It was $176,100 in 2025 and $168,600 in 2024.

One detail adds to the bill as your income grows. Higher earners pay an extra Medicare tax of 0.9% on earnings above set thresholds. They're $200,000 for single filers and heads of household and $250,000 for married couples filing jointly. For married people filing separately, the threshold is $125,000. The full calculation is in Self-Employment Tax: How It Works and How to Calculate It.

What would change if you elected S status

Now say you elect S corp taxation. The profit is the same, but it reaches you by a different route, and different taxes apply on the way. An S corporation passes these items through to its shareholders:

1. income
2. losses
3. deductions
4. credits

You'd report them on your personal return. The company doesn't pay federal income tax on its ordinary income, so it avoids the double taxation of a C corp. The IRS notes it can still owe tax on certain built-in gains and passive income.

The saving comes from how you're paid. Part of your money becomes a salary (W-2 wages) that goes through payroll. Social Security and Medicare taxes are withheld and paid on it at 15.3% in total, shared between the company and you as the employee.

The rest of the profit can be paid out as distributions. You pay income tax on them on your own return. But they aren't subject to Social Security or Medicare tax.

Your mailbox also gets fuller. The S corp files Form 1120-S with a Schedule K-1 for each shareholder. It files Form 941 for payroll taxes (Form 943 for farms) and Form 940 for federal unemployment tax (FUTA). You report the income on Form 1040 with Schedule E and pay estimated tax with Form 1040-ES.

The salary you'd have to pay yourself

This is where a tempting idea shows up. Distributions avoid payroll tax, so you might think of taking a tiny salary and paying everything else as distributions. The IRS rules stop this.

An S corp must pay a working shareholder reasonable compensation for those services. If the salary is too low, the IRS can reclassify distributions as wages and charge payroll tax on them. The IRS gives no formula. It lists the factors it looks at:

• the owner's training and experience
• duties and responsibilities
• time and effort put into the business
• what comparable businesses pay for similar services
• what the company pays employees who aren't shareholders
• its history of paying dividends
• the timing and manner of bonuses to key people
• compensation agreements
• any formula used to set pay

In practice, your salary should look like what the company would pay someone else to do your job.

Checking whether your company can elect at all

Before you run any numbers, make sure your company qualifies. The election works only if it meets these conditions:

• it's a domestic corporation or a domestic eligible entity, such as an LLC
• it has no more than 100 shareholders
• it has only one class of stock
• every shareholder consents to the election

Shareholders may be individuals, certain trusts and estates. The Form 2553 instructions also list certain exempt organizations. Partnerships, corporations and nonresident aliens can't hold shares.

Some businesses are ineligible no matter who owns them. These include certain banks and insurance companies. DISCs (a special type of export company) are excluded too.

If you own your LLC from outside the US

This is the point where many foreign owners stop. Google's AI Overview and several popular guides say S corp owners must be "US citizens or permanent residents". The IRS wording is narrower: it excludes nonresident aliens.

A nonresident alien is a foreign person who isn't a US tax resident. So a foreign person who is a US tax resident can be a shareholder. A foreign person who lives abroad and isn't a US tax resident can't.

If even one member of your LLC is a nonresident alien, the LLC can't be an S corp. Such an LLC usually stays with default taxation. Or it can elect to be taxed as a corporation with Form 8832, and each route has its own filings.

In our work with clients, most non-residents choose an LLC because it's simpler. They move to a corporation later as revenue grows. Ownership rules for foreign owners are covered in Can a Non-US Resident Own a US LLC? What It Involves.

LLC vs S corp taxes at $200,000 of profit

If you qualify, the next question is money. We worked this example out ourselves from the 2026 federal rates above. It covers only Social Security and Medicare taxes, not income tax. Say you're a single owner filing as single, and your net profit is $200,000.

The difference is about $12,934. The extra 0.9% Medicare tax doesn't apply here. That's because $184,700 is below the $200,000 threshold for a single filer.

That figure is a ceiling, not the amount you'd keep. Several things eat into it:

1. Running payroll needs a payroll service or an accountant.
2. The separate Form 1120-S has to be prepared every year.
3. The qualified business income (QBI) deduction can shrink.
4. Some states tax S corps separately, as the California example below shows.
5. Both payroll-tax deductions change income tax, which the table leaves out.

The QBI deduction lets many owners deduct up to 20% of business income. Rho and Taxstra note that wages you get from your own S corp don't count as QBI. So a higher salary means a smaller deduction. According to the Texas Society of CPAs, a 2025 federal law made the QBI deduction permanent.

The last point in that list covers two deductions. One is your deduction for the employer-equivalent part of self-employment tax. The other is the company's deduction for its share of payroll tax.

Your salary also has to be one the IRS would accept. If $100,000 is too low for your work, the real saving is smaller. And the risk of reclassification is higher.

The same math in a quieter year

Now say your profit is $50,000 instead. We used the same rates again. As a default LLC owner, you'd pay self-employment tax on $46,175 (92.35%). That comes to about $7,065.

An S corp paying you a $35,000 salary owes $5,355 in payroll tax. So the difference is about $1,710 a year.

Stripe estimates the running costs of an S corp at $1,500 to $4,000 a year. Taxstra puts them at $2,000 to $4,000 a year. At this level of profit, the election can easily cost you more than it saves.

The profit level where an S corp starts to pay

After those two examples, you'll probably want one clear cut-off number. Popular guides give different rules of thumb, and none of them cites a source for its figure.

There's no single number, because your result depends on several things:

• the salary the IRS would see as reasonable
• the cost of payroll and tax preparation
• how your state treats S corps
• the effect on the QBI deduction
• whether profit is steady from year to year

S corp status is unlikely to suit you if a nonresident alien, partnership or corporation is among the owners. The same goes for low or unpredictable profit. It also fits poorly when a reasonable salary would be close to the whole profit. And it needs someone willing to run payroll and file an extra return on time every year.

Filing the election before March 15

Say the numbers work and you decide to go ahead. You don't need to form a new company. Your LLC files Form 2553, "Election by a Small Business Corporation." All shareholders sign it, which for an LLC means all members. The IRS instructions say an LLC electing S status generally doesn't need to file Form 8832 first.

Most problems with the election come from timing. You have to file no more than 2 months and 15 days after the start of the tax year it should apply to. You can also file at any time during the year before. For a company whose tax year starts on January 1, that works out to March 15.

For a company in its first year, the effective date is the earliest of three dates:

• the day it first had shareholders
• the day it first had assets
• the day it began doing business

If you miss the deadline, it can sometimes be fixed. Under Rev. Proc. 2013-30, the IRS may accept a late election if there was reasonable cause and the company acted diligently. The company and all shareholders must also have reported as if the election had been in place. The late election must be filed within 3 years and 75 days of the effective date.

There's also a waiting period if S status ever ends. If it's revoked or terminated, the company generally needs IRS consent to elect again. That applies before the fifth tax year after the year the termination took effect. This is what people mean by the "5-year rule."

The first year as an S corp: payroll and a new return

Every rule of thumb above assumes you'll keep up with the extra work. These duties come back every year, whether the business does well or not. The company runs payroll and files Form 941, Form 940 and W-2s. Each shareholder gets a Schedule K-1.

Form 1120-S is due on the 15th day of the 3rd month after the tax year ends. For a calendar-year company, that's March 15. If that falls on a weekend or holiday, it moves to the next business day. An S corp that files 10 or more returns of any type in a calendar year must file Form 1120-S electronically.

Health insurance and the 2% rule

If you pay for health insurance through the company, there's one more rule to know. The "2% rule" applies to shareholders who own more than 2% of an S corp. It changes how their fringe benefits are treated.

Say your S corp pays health insurance premiums for you as a shareholder-employee. The company can deduct them. The premiums are added to your wages in Box 1 of the W-2, where income tax withholding applies.

Under a qualifying plan, these premiums are generally not subject to Social Security, Medicare or FUTA tax. You may then take an above-the-line deduction if the conditions are met.

You lose the deduction if you buy the policy alone and pay for it with personal money. More-than-2% shareholders also can't take part in a QSEHRA, an FSA or an HRA.

State taxes that change the LLC vs S corp answer

So far everything has been federal, but your state can change the result. Federal S corp status doesn't decide state taxes. California has these rules:

1. S corps with California income pay a 1.5% tax.
2. Every corporation incorporated, registered or doing business in the state owes the $800 minimum franchise tax, even when inactive or at a loss.
3. A newly formed S corp doesn't pay the $800 for its first taxable year.
4. The return is filed on Form 100S.

The California Franchise Tax Board's S corp page doesn't address LLCs. So if you have a California LLC and are thinking about S status, ask an accountant how the LLC and S corp rules combine. The LLC side is covered in California LLC Taxes and the $800 Franchise Tax.

Texas charges a franchise tax on taxable entities. The no-tax-due threshold for the 2026 and 2027 reports is $2,650,000, and entities below it owe no franchise tax. Reports are due May 15. The rates are 0.375% for retail and wholesale and 0.75% for other businesses. Other states have their own rules, so check yours before deciding.

If S status is off the table: the C corp

Owners who can't use S status often end up looking at a third option. A C corp pays federal income tax on its profit at a flat 21%. Profit later paid out to owners as dividends is taxed again on their returns. This is the double taxation that S status avoids.

A C corp can still suit some businesses. One example is when partnerships, other companies or nonresident aliens are among the owners, since an S corp allows none of them. An LLC can also elect to be taxed as a corporation with Form 8832. A broader comparison is in LLC vs Corporation.

Mistakes that cost owners the benefit

Even if you qualify, you can lose the saving through avoidable errors. Most of them follow straight from the rules above:

• paying no salary, or one that's too low, so the IRS can treat distributions as wages
• missing the Form 2553 deadline (late election relief exists, but only under its conditions)
• having a nonresident alien, partnership or corporation among the owners
• giving owners shares with different rights, which breaks the one-class-of-stock rule
• electing S status without setting up payroll
• having a more-than-2% owner buy health insurance alone with personal money, which loses the deduction
• filing Form 1120-S late, which triggers the per-shareholder penalty even when no tax is due
• electing again too soon after S status ends, when the 5-year rule generally applies

What to do this month

If you live outside the US and aren't a US tax resident, the decision is already made, because you can't hold S corp shares. Your choice is between default LLC taxation and corporate taxation.

If you're eligible, start with last year's profit and how steady it has been. Then think about a salary the IRS would accept for your work, since the saving depends on it. Check your state's rules too, especially in California.

Mark March 15 in your calendar if you want S status for the coming year. Before you file anything, have an accountant run these numbers for your company. How to Choose an Accountant for a Small Business explains what to look for.

Whichever tax status you pick, customers never see it. What they see is the company online. Our team sets that part up for new companies, from the Google profile to a landing page and a press release.