S corp vs LLC: 5 key differences

By Nicolas StrautPublished Oct 10, 202611 min read

Key takeaways

An S corp election on an LLC saves $2,547.78 of 2026 federal tax at $100,000 of profit and a 60% salary, about half the $4,907.55 that comparing payroll tax alone suggests, because the salary no longer counts toward the 20% QBI deduction.¹
S corp vs LLC is not an either-or choice: an LLC is formed under state law, and S corp status is a federal tax election the LLC files on Form 2553 by March 15, 2027 to take effect for 2027.²
A default LLC is the better fit for owners whose profit is uneven or below their break-even, while the S corp election is the better fit for owners with steady profit above their break-even who can run payroll and support a reasonable salary.

In this article

S corp vs LLC at a glance
What is an LLC?
What is an S corp?
S corp vs LLC compared: Key differences
How much do S corps save?
What does an S corp cost to run?
At what profit does an S corp make sense?
Benefits and disadvantages of an S corp
Verdict: Is an S corp or an LLC better for your business?
How to elect S corp status for your LLC
How to run your numbers before you file Form 2553
Frequently asked questions about S corp vs LLC

An LLC is a legal entity your state creates, and an S corp is a federal tax status, so one LLC can be both. A default LLC pays self-employment tax on most of its profit. An S corp election moves that tax onto a salary you pay yourself, at the cost of payroll, a second return, and a smaller QBI deduction. This guide compares a default LLC and an S corp election across structure, ownership, tax, savings, and cost.

S corp vs LLC at a glance

	Default single-member LLC	LLC taxed as an S corp	Corporation taxed as an S corp
Best for	Owners with uneven profit or profit below their break-even	One-owner businesses with steady profit above their break-even	Owners who already run a state corporation
What it is	State-law entity	Same LLC, with a federal tax election	State corporation, with a federal tax election
How you form it	Articles of organization with your state	Form 2553 filed by the existing LLC	Articles of incorporation, then Form 2553
Federal return	Schedule C on your Form 1040	Form 1120-S, plus Schedule K-1 to you	Form 1120-S, plus Schedule K-1 to you
Tax on your earnings	15.3% self-employment tax on 92.35% of profit	15.3% payroll tax on your salary only	15.3% payroll tax on your salary only
Owners allowed	Any number, any type	Up to 100; individuals, estates, and certain trusts; no nonresident aliens	Same as the LLC column
Classes of ownership	Flexible	One class of stock	One class of stock
Governance	State LLC law and your operating agreement	Unchanged: still state LLC law	Board, officers, bylaws under state corporate law
Payroll required	No	Yes, for an owner who works in the business	Yes, for an owner who works in the business

What is an LLC?

An LLC is a business entity created under state law. You form one by filing articles of organization with your state, and the liability protection it gives you comes from that state's LLC statute, not from the IRS. For federal tax, the IRS treats a one-owner LLC as a disregarded entity by default, so it files the same way a sole proprietor does. LLC vs sole proprietorship shows the two side by side.

What is an S corp?

An S corp is a corporation, or an LLC treated as one, that has elected under Subchapter S to pass its income through to its owners instead of paying corporate income tax. The purpose of the election is pass-through taxation with the owner's pay split into a salary and distributions.

Can a single-member LLC be taxed as an S corp?

A single-member LLC can be taxed as an S corp by filing Form 2553, and the one owner becomes both the shareholder and an employee paid through payroll. The LLC is treated as a corporation from the election date and does not also file Form 8832. The LLC has to meet the limits under "Ownership rules" below. Whether the election pays off for one owner depends on profit, as "How much do S corps save?" shows.

S corp vs LLC compared: Key differences

The key differences between an S corp and an LLC are how profit is taxed, who can own the business, and how much filing it takes, while the legal structure stays the same when an LLC elects. Five differences follow, then the three things the two have in common.

Legal structure and liability protection

The legal structure and liability protection of an LLC do not change when it elects S corp status, because the election is a federal tax choice, not a new entity. Governance stays under state LLC law and your operating agreement. A board of directors, officers, and bylaws apply only to a state corporation taxed as an S corp, not to an LLC that has made the election.

Ownership rules

Ownership rules are looser for an LLC than for an S corp. An LLC can have any number and type of owners. An S corp allows up to 100 shareholders who are individuals, estates, certain trusts, or certain exempt organizations, with no nonresident aliens. Partnerships and corporations cannot be shareholders.

An S corp can have only one class of stock, so profit has to follow ownership. A default LLC can split profit however its operating agreement says.

How profit is taxed

Profit in a default single-member LLC is taxed as sole proprietorship income on Schedule C, with self-employment tax on 92.35% of it, while profit in an LLC taxed as an S corp is split into a salary and a K-1 distribution.³

In a default LLC, the self-employment tax rate is 15.3%, and income tax applies to the same profit on your Form 1040. What is self-employment tax covers how self-employment tax is calculated. An LLC with two or more owners defaults to partnership treatment instead. LLC taxes covers partnership treatment in full.

In an S corp, the company pays you a W-2 salary and withholds and pays Social Security and Medicare on it: 7.65% from you and 7.65% from the company. The remaining profit passes to you on Schedule K-1, subject to income tax but not to Social Security or Medicare. That is where the saving comes from.

Reasonable salary for S corp owners

A reasonable salary for S corp owners is the pay the IRS expects an owner who works in the business to take before any distribution. The IRS can reclassify distributions as wages if the salary is too low.⁴ The IRS lists nine factors courts have used to decide what is reasonable:

Training and experience
Duties and responsibilities
Time and effort devoted to the business
Dividend history
Payments to non-shareholder employees
Timing and manner of paying bonuses to key people
What comparable businesses pay for similar services
Compensation agreements
The use of a formula to determine compensation

The IRS publishes no percentage. The 60% and 50% salary figures in the tables below are modelling assumptions, not IRS guidance.

Paperwork and filing

Paperwork and filing grow with an S corp election, because the LLC adds payroll filings and a separate federal return to your Form 1040.

Default LLC: Schedule C on your Form 1040.
LLC taxed as an S corp: payroll every pay period, quarterly Form 941, annual Form 940, and a W-2 for you; Form 1120-S and a Schedule K-1 each year; and Form 2553 once. S corp taxes covers how each one works.

What an S corp and an LLC have in common

An S corp and an LLC have three things in common:

Liability protection: the protection comes from a state filing, and the election does not change it.
Pass-through taxation: neither generally pays federal income tax at the entity level, and profit is taxed on the owner's return.
State upkeep: both keep a registered agent and file the state's annual report.

How much do S corps save?

An S corp saves $2,547.78 of federal tax in this example. The example assumes a single filer with no W-2 job and no other income, the standard deduction, 2026 federal figures, no state tax, and $100,000 of profit before the owner's pay, with the salary set at 60% of profit as an illustration only.⁵ Payroll tax is both halves of Social Security and Medicare plus $42 of FUTA. State unemployment tax is not modelled.

	Default LLC	LLC taxed as an S corp
Owner's salary	None	$60,000.00
Self-employment or payroll tax	$14,129.55	$9,222.00
QBI deduction	$15,367.05	$7,073.60
Taxable income	$61,468.18	$72,194.40
Federal income tax	$8,235.00	$10,594.77
Total federal tax	$22,364.55	$19,816.77
Saving from the election		$2,547.78

Payroll tax savings

The payroll tax savings in this example are $4,907.55, the difference between $14,129.55 of self-employment tax and $9,222.00 of payroll tax. That is the payroll-tax figure only. The payroll-tax figure leaves out what the election changes on the income tax side, which the next section covers.

How the election reduces the QBI deduction

The election reduces the QBI deduction because a salary paid by your own S corp is excluded from qualified business income under §199A(c)(4). The 20% deduction applies only to the $35,368.00 left on the K-1. In this example that costs $2,359.77 of extra income tax. The net result is $4,907.55 saved, $2,359.77 given back, and $2,547.78 kept, before payroll and tax-prep fees.

Savings at each profit level

Savings at each profit level rise more slowly than the payroll-tax figure suggests. The table below sets the salary at 60%, with the same assumptions:

Profit	Default LLC total	S corp total	Payroll-tax-only saving	Actual federal saving
$40,000	$7,426.93	$5,769.71	$1,937.82	$1,657.22
$60,000	$12,037.20	$9,725.58	$2,927.73	$2,311.61
$80,000	$16,647.47	$14,094.34	$3,917.64	$2,553.13
$100,000	$22,364.55	$19,816.77	$4,907.55	$2,547.78
$150,000	$37,607.62	$34,336.02	$7,382.32	$3,271.61

Between $80,000 and $100,000 the saving barely changes. The extra salary is taxed in the 22% bracket, and the QBI deduction the election gives up grows with the salary.

What does an S corp cost to run?

An S corp costs more to run than a default LLC because it adds three expenses: a payroll service, preparation of Form 1120-S, and in some states an entity-level tax.

Payroll service: software or a provider to run your salary, withholding, and Forms 941 and 940 every year.
Form 1120-S preparation: the added preparer fee for the company's return and your K-1, on top of your Form 1040.
State taxes and fees: some states, such as California, tax S corps at the entity level, and New York City charges its General Corporation Tax on S corps. The state annual report fee applies to an LLC either way, and how much does an LLC cost lists it by state.

The employer's half of Social Security and Medicare and the $42 of FUTA are already counted in the savings tables above. State unemployment tax is not.

At what profit does an S corp make sense?

An S corp makes sense once the federal saving is more than what payroll and the extra return cost you each year. That break-even point moves by tens of thousands of dollars with your salary share and your cost. Use your own quote for payroll software and a Form 1120-S preparer to pick the row.

Added annual cost of the S corp	Break-even profit, salary at 50%	Break-even profit, salary at 60%
$1,500	about $24,800	about $35,200
$2,000	about $33,000	about $50,500
$2,500	about $43,400	about $65,800
$3,000	about $53,400	about $124,200

The $3,000 row at a 60% salary jumps to about $124,200 because the saving is nearly flat from $80,000 to $100,000, at $2,553.13 and $2,547.78 in the savings table above. The saving doesn't reach $3,000 until profit is well past that range.

Run your profit through the Solvent self-employment tax calculator to get the default LLC's self-employment tax, then read across the table.

Benefits and disadvantages of an S corp

The benefits and disadvantages of an S corp come down to lower payroll tax and an unchanged LLC vs higher running costs and tighter rules.

Benefits of an S corp

The benefits of an S corp for a one-owner LLC are these three:

Lower Social Security and Medicare tax: profit above your salary reaches you as a K-1 distribution with no payroll tax on it, worth the amount shown in "How much do S corps save?".
No change to the LLC itself: the election changes only federal tax, so liability protection, the operating agreement, and LLC governance stay as they were.
No new entity to form: the existing LLC elects with one form, Form 2553, and does not also file Form 8832.

Disadvantages of an S corp

The disadvantages of an S corp for a one-owner LLC are these three:

Higher running costs: payroll, a second federal return, and, in some states, an entity-level tax, as listed in "What does an S corp cost to run?".
A smaller QBI deduction: your salary drops out of the 20% deduction, which gives back part of the payroll-tax saving.
Tighter ownership rules: the shareholder limits and the one-class-of-stock rule under "Ownership rules" apply, so profit has to follow ownership.

Verdict: Is an S corp or an LLC better for your business?

An S corp election is better for your business than a default LLC when your profit stays above your break-even in most years, while a default LLC is better below your break-even.

Choose a default LLC if

Your profit is below the break-even row that matches your own cost quote and salary.
Your profit swings year to year, so a fixed salary could use up most of a bad year's profit.
You want owners the S corp rules exclude, or profit splits that differ from ownership.
You would rather not run payroll or file a second federal return.

Choose the S corp election if

Your profit sits above your break-even row in most years, not just the best one.
You can document a salary that meets the reasonable-compensation factors.
You are prepared to run payroll and file a separate return every year.
Your owners are all individuals, estates, or certain trusts, with no nonresident aliens.

How to elect S corp status for your LLC

To elect S corp status for your LLC, you file Form 2553 with the IRS.

1. Confirm the LLC meets the ownership rules above.
2. File Form 2553, signed by every owner, no more than 2 months and 15 days after the start of the tax year it should apply to. For a calendar-year LLC that wants the election for 2027, that is March 15, 2027, so decide by early March.
3. Set up payroll before the first distribution.
4. If the deadline has passed, Rev. Proc. 2013-30 relief allows a late election within 3 years and 75 days of the intended effective date, with "FILED PURSUANT TO REV. PROC. 2013-30" written at the top of the form.

How to run your numbers before you file Form 2553

Put your profit through the Solvent self-employment tax calculator for the default LLC side, then compare it with the break-even table above. Then use the Solvent quarterly tax estimator to see what the remaining income tax means for each quarterly payment you'll make.

Frequently asked questions about S corp vs LLC

Can an S corp own 100% of an LLC?

Yes, an S corp can own 100% of an LLC. That LLC is then disregarded for federal income tax, so its income appears on the S corp's own return. The LLC still exists under state law, so it keeps its own liability protection, registration, and annual report.

What is the 5 year rule for S corp?

The 5 year rule for an S corp means that once an S election terminates or is revoked, the company generally needs IRS consent to elect again before its fifth tax year after the termination took effect. The rule makes the election hard to turn off and back on as profit changes.

What is the 2% rule for S-Corp?

The 2% rule for an S corp covers owners holding more than 2% of the shares. Health insurance the company pays for them is reported as wages for income tax, though it is not subject to Social Security, Medicare, or FUTA when the plan meets the IRS conditions.

Do you still pay quarterly estimated taxes with an S corp?

Yes, you usually still pay quarterly estimated taxes with an S corp, because the K-1 profit has no withholding. Payroll withholding covers only the salary, so the income tax on distributions is paid through Form 1040-ES, or by raising the withholding on your own salary.

How do I know if my LLC is taxed as an S corp?

You know your LLC is taxed as an S corp if the IRS sent the company a notice accepting its Form 2553. Without that notice, the LLC is taxed under its default rules. You can also check which return the LLC files: Form 1120-S for an S corp, Schedule C or Form 1065 by default.

About the author

Nicolas Straut

Personal and business finance writer, former Forbes contributor

Nicolas Straut writes about self-employment and quarterly tax, LLC formation and costs, and tax software for Solvent. He has written about money for about ten years, including for the fintech companies NorthOne and Fundera. He files his own taxes as a freelancer. He isn't a CPA or an enrolled agent (EA).

Sources

https://www.law.cornell.edu/uscode/text/26/199A
https://www.irs.gov/instructions/i2553
https://www.irs.gov/taxtopics/tc554 · https://www.irs.gov/taxtopics/tc759
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues
https://www.irs.gov/pub/irs-drop/rp-25-32.pdf