LLC vs S-Corp: Which Business Structure Saves You More Tax in 2026?
Detailed comparison of LLC vs S-Corporation tax treatment. Calculator-based analysis showing exactly when S-Corp election saves money and how much you could keep.
LLC vs S-Corp: The Core Tax Difference
A single-member LLC taxed as a sole proprietor pays 15.3% self-employment tax on ALL net profit. An LLC electing S-Corp status pays SE tax ONLY on the owner's reasonable salary — distributions above that salary are exempt from self-employment tax. This one difference can save $5,000-15,000+ per year.
When Does S-Corp Make Sense?
The breakeven point is typically $60,000-80,000 in net profit. Below this, the additional costs of payroll ($500-1,000/year), separate tax return preparation ($1,000-2,000/year), and state franchise taxes may exceed the tax savings. Above $80,000-100,000, the savings accelerate quickly.
Example: $120,000 Net Profit
Sole Proprietor SE tax: 15.3% on $120,000 × 92.35% = $16,955. S-Corp with $70K reasonable salary: SE tax on $70,000 × 92.35% × 15.3% = $9,891. Annual savings: $7,064. Over 10 years: $70,640 in tax savings.
What Is a Reasonable Salary?
The IRS requires S-Corp owners to pay themselves a reasonable salary for their work before taking distributions. For most service businesses, 40-60% of profit is typical. Document salary determination with comparable data (BLS wage data, industry salary surveys). Severe underpayment triggers IRS reclassification, back taxes, and 100% penalty.
Additional S-Corp Requirements
S-Corp election (Form 2553), payroll setup (Gusto, QuickBooks Payroll), separate tax return (Form 1120S), reasonable salary documentation, quarterly payroll tax filings (Form 941), annual W-2 issuance for yourself, state-level registration (some states impose entity-level taxes on S-Corps), and annual minutes/maintenance.
Frequently Asked Questions
Can I switch from sole proprietor to S-Corp mid-year?
What is the smallest profit where S-Corp makes sense?
Does an LLC alone reduce self-employment tax?
Sources
- IRS Revenue Procedure 2025-32 — 2026 inflation adjustments — tax brackets, standard deduction, QBI thresholds.
- IRS Schedule SE instructions — Self-employment tax: the 92.35% adjustment, the Social Security wage base, the Medicare surtax.
- IRS Form 1040-ES — Estimated tax deadlines and the safe-harbour rules used for the quarterly schedule.
- IRS Publication 334 — Tax guide for small business — deductible expenses and net profit.
- IRS Social Security wage base — The $184,500 Social Security cap applied for 2026.
How these numbers are produced
Calculations follow the order of operations on the IRS forms themselves: net profit, the 92.35% adjustment, self-employment tax, the 50% deduction against AGI, the standard deduction, the §199A QBI deduction with its phase-out, then the federal brackets. State tax is computed separately on state AGI less that state's own standard deduction, because no state allows the federal QBI deduction and almost none allow the federal standard deduction.
What it does not cover. The calculators model a single filer or a married couple filing jointly with self-employment income as the main source. They do not model local income taxes, W-2 wages held alongside freelance work, itemized deductions, the alternative minimum tax, or credits. Where a local income tax exists, it is described on that state's page.
Not advice. SelfTaxCalc produces estimates, not tax advice. No one here is a CPA, an enrolled agent or a tax attorney, and nothing on this site creates a professional relationship. Estimates are a starting point for planning and for a conversation with a professional — they are not a substitute for one.