S-Corp vs C-Corp: Tax Comparison for Small Business 2026

Compare S-Corporation and C-Corporation tax structures — pass-through taxation, double taxation, salaries, and which structure fits your business.

Pass-Through vs Double Taxation

S-Corps are pass-through entities: profits flow to your personal return and are taxed once at individual rates. C-Corps pay corporate income tax (21% federal) and shareholders pay tax again on dividends — the double taxation problem. For most small businesses, S-Corp wins on pure tax efficiency.

The Self-Employment Tax Angle

S-Corp owners pay SE tax only on their reasonable salary; distributions escape it. C-Corp owners pay themselves a salary (subject to FICA) and receive dividends (taxed at capital gains rates). Both avoid full SE tax on all profit, but C-Corp dividends face the second layer of corporate tax.

When C-Corp Makes Sense

C-Corps make sense for: businesses planning to raise venture capital, retain earnings for growth (corporate rates may beat individual rates), offer stock options, or go public. The 21% corporate rate plus qualified dividend rates can beat individual rates for high-reinvestment businesses.

Compliance Burdens

S-Corps file Form 1120S with a K-1 per owner. C-Corps file Form 1120, hold board meetings, maintain minutes, and face stricter corporate formalities. Both require payroll if the owner takes a salary. S-Corp compliance costs roughly $1,000-2,500/year; C-Corp $1,500-3,500/year.

Frequently Asked Questions

Which saves more tax: S-Corp or C-Corp?
For most small service businesses under $500K profit, S-Corp saves more because profits are taxed once. C-Corp wins when retaining large earnings in the business for growth, since the 21% corporate rate is lower than top individual brackets.
Can I convert from S-Corp to C-Corp?
Yes, by filing a revocation of the S election. Converting C-Corp to S-Corp is more complex — the built-in gains tax can apply for 5 years. Plan conversions with a CPA.
Do C-Corps pay self-employment tax?
No. C-Corp profits don't flow to your personal return, so no SE tax applies. Owner-employees pay FICA on salary (7.65% each from employer and employee) and capital gains tax on qualified dividends.