S-Corp vs LLC: Complete Tax Comparison Guide (2026)

S-Corp vs LLC at a Glance

Here is a side-by-side comparison of the key differences between an LLC (taxed as sole proprietorship) and an S-Corp for 2026.

How LLC Taxation Works

A single-member LLC is a "disregarded entity" by default, meaning the IRS treats it exactly like a sole proprietorship. All net business income flows through to your personal tax return on Schedule C and is subject to both income tax and self-employment tax. You pay 15.3% self-employment tax (12.4% Social Security + 2.9% Medicare) on the first $176,100 of net earnings in 2026, and 2.9% Medicare on everything above that threshold.

For a multi-member LLC, the default is partnership taxation. Each member reports their share of income on Schedule K-1 and pays self-employment tax on their distributive share. Either way, every dollar of profit is hit with self-employment tax — there is no way to split income between salary and distributions under default LLC taxation.

The advantage of an LLC is simplicity. There is no payroll to run, no separate business tax return for a single-member LLC, and minimal compliance costs. If your net income is under $40,000, an LLC is almost always the right choice because the self-employment tax savings from an S-Corp would not exceed the additional compliance costs.

How S-Corp Taxation Works

An S-Corp is a tax election, not a business entity. You can form an LLC and then elect S-Corp tax treatment by filing Form 2553 with the IRS. The key difference is how owner compensation is handled: S-Corp owners who work in the business must pay themselves a "reasonable salary" through payroll, subject to FICA taxes. Any remaining profit can be distributed to the owner as a shareholder distribution, which is not subject to self-employment tax.

This salary-plus-distribution structure is where the tax savings come from. Instead of paying 15.3% self-employment tax on all net income, you only pay it on your salary. The distributions are still subject to income tax, but they avoid the 15.3% FICA hit entirely.

The tradeoff is increased complexity: you must run payroll (including quarterly tax deposits and W-2 filing), file a separate Form 1120-S corporate tax return, and maintain reasonable compensation documentation. These additional costs typically run $1,500-$3,000 per year.

The Math: How Much Can an S-Corp Save You?

The S-Corp tax advantage is straightforward to calculate. Take your net business income, subtract your reasonable salary, and multiply the difference by 15.3% — that is your approximate annual self-employment tax savings. Here are three real-world examples for 2026.

When Should You Elect S-Corp Status?

The breakeven point for S-Corp election is typically $40,000-$50,000 in annual net business income. Below that threshold, the self-employment tax savings are too small to justify the $1,500-$3,000 in annual compliance costs. Above that threshold, the savings grow rapidly and the S-Corp election almost always makes financial sense.

Consider electing S-Corp status if:

• Your net business income consistently exceeds $50,000 per year
• You plan to stay in business for at least 2-3 more years
• You can commit to running payroll and filing a corporate tax return
• Your business is profitable (losses are harder to utilize in an S-Corp)
• You do not need multiple classes of stock or foreign shareholders

The deadline to elect S-Corp status is March 15 of the tax year. If you miss it, you can file Form 2553 with a reasonable cause statement, or wait until the following year. Many business owners file in January to start the year clean.

What Is a "Reasonable Salary" for S-Corp Owners?

The IRS requires S-Corp owners who perform services for the business to pay themselves a reasonable salary. There is no fixed formula, but the IRS looks at what you would pay an unrelated person to do the same work. Setting your salary too low is the number one S-Corp audit trigger — the IRS has won every major court case on this issue.

Factors the IRS considers when evaluating reasonable compensation:

• Training, experience, and education required for the role
• Comparable salaries for similar positions in your industry and geography
• Time and effort you devote to the business
• The company's gross and net income
• Dividend history and distribution patterns

As a general guideline, most tax professionals recommend a salary of 40-60% of net business income. Use tools like the Bureau of Labor Statistics Occupational Employment data or salary surveys from Robert Half or Glassdoor to document comparable market salaries. Keep this documentation on file — if audited, you will need to justify your salary level.

State-by-State Considerations

State taxes can significantly affect the S-Corp vs LLC decision. Some states impose additional taxes or fees on S-Corps that reduce or eliminate the federal tax savings. Here are the key states to watch.

• California: 1.5% franchise tax on net income (minimum $800/year), plus an $800 annual LLC fee. The S-Corp franchise tax can be substantial for high-income businesses.
• New York: Fixed dollar minimum tax based on receipts ($25-$4,500) plus NYC taxes for city-based businesses.
• Texas: No state income tax, but the franchise (margin) tax applies to both LLCs and S-Corps with revenue over $2.47 million.
• Florida: No state income tax and no additional S-Corp tax — one of the most S-Corp-friendly states.
• New Hampshire: 7.5% Business Profits Tax applies to S-Corps at the entity level.
• Tennessee: No state income tax — very S-Corp friendly.

Always consult with a tax professional who understands your specific state's treatment of S-Corps before making the election. The federal savings are clear-cut, but state-level taxes can change the math.

How the QBI Deduction (Section 199A) Affects Your Choice

The Qualified Business Income (QBI) deduction allows eligible business owners to deduct up to 20% of their qualified business income from their taxable income. Both LLCs and S-Corps can claim this deduction, but it works slightly differently for each.

For an LLC taxed as a sole proprietorship, the QBI deduction is calculated on your net Schedule C income. For an S-Corp, it is calculated on your net income after subtracting your salary — meaning a lower QBI deduction base. However, the self-employment tax savings from the S-Corp almost always exceed the slightly reduced QBI deduction.

For 2026, the QBI deduction phases out for single filers with taxable income above $191,950 and married filing jointly above $383,900 for specified service trades or businesses (SSTBs). If you are in a service industry and approaching these thresholds, the interaction between your S-Corp salary and QBI deduction requires careful planning.

5 Common S-Corp Mistakes to Avoid

1. Setting salary too low: Paying yourself $20,000 on $200,000 of income is a red flag. The IRS has successfully challenged unreasonably low salaries in cases like Watson v. Commissioner and Radtke v. United States.
2. Missing payroll deposits: S-Corp owners must deposit payroll taxes on time (semi-weekly or monthly depending on size). Late deposits trigger penalties starting at 2% and rising to 15%.
3. Not running payroll at all: Some S-Corp owners take only distributions and skip salary entirely. This is illegal and invites an audit.
4. Electing too early: If your business income is under $40,000, the compliance costs may exceed your tax savings. Wait until income is stable and above the breakeven threshold.
5. Ignoring state taxes: California's 1.5% franchise tax on a $300,000 S-Corp nets $4,500 in additional state tax. Factor this into your savings calculation.