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.

LLC vs S-Corp Calculator

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.

Run your own numbers

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?
Form 2553 is effective for the tax year if filed by March 15 (calendar year) or within 75 days of formation. Late election relief (Rev. Proc. 2013-30) is available if you had reasonable cause for the delay.
What is the smallest profit where S-Corp makes sense?
Around $60,000-80,000 net profit. Below this, compliance costs typically exceed tax savings. Run the numbers for your specific state using our calculator — some states (CA, NY) impose high LLC/S-Corp fees that shift the breakeven higher.
Does an LLC alone reduce self-employment tax?
No. An LLC provides liability protection but does NOT change your tax treatment. A single-member LLC is taxed identically to a sole proprietor by default. You must elect S-Corp or C-Corp status to change your tax treatment.