S corp vs LLC

The whole difference is employment tax

An LLC and an S corporation are both pass-through entities. An LLC puts the profit on your 1040 at ordinary rates. An S corp splits the same profit into W-2 wages and a K-1 distribution, and both of those land on your 1040 at the same ordinary rates.

So the income tax largely cancels between the two, and everything that is left is employment tax. That is the useful thing to know before reading any further, because it means the comparison does not depend on your tax bracket, your filing status, or where the brackets sit this year. It depends on one thing: how much of the profit comes out as salary.

An LLC owner pays self-employment tax on the lot. An S corp pays FICA on the salary and nothing at all on the distribution. That gap is the entire case for electing.

But the saving is not 15.3% of your distribution

This is the number nearly every comparison gets wrong, and it is wrong in a direction that matters.

A sole proprietor does not pay self-employment tax on their profit. They pay it on 92.35% of their profit. Schedule SE line 4a says so in as many words: if line 3 is more than zero, multiply line 3 by 92.35%. That reduction exists to approximate the employer half of FICA that an employee never sees on their own payslip.

An S corp gets no equivalent reduction. FICA is 15.3% of the salary, flat.

sole proprietor   15.3% x 92.35% of profit  =  14.13% of profit
S corp            15.3% of salary

On $100,000 of profit with a $60,000 salary, the LLC pays $14,129.55 and the S corp pays $9,180. The real saving is $4,949.55. The "15.3% of your $40,000 distribution" answer gives $6,120, which is $1,170 too high, or nearly a quarter over.

That error never runs the other way. It always makes the election look better than it is, which is worth knowing about whoever is showing you the number.

Which means there is a salary where the election starts costing you money

Follow the same arithmetic to its end. The two are equal when 15.3% of salary equals 15.3% of 92.35% of profit, which is when the salary reaches 92.35% of profit. Above that, the LLC is cheaper on employment tax than the S corp.

Paying yourself the entire profit as salary is the worst available outcome: 15.3% of everything as an S corp, against 14.13% as an LLC, plus payroll to run and a second return to file for the privilege.

This is not a fringe case. It is the answer for a great many one-person service businesses where the whole profit is plainly payment for the owner's own labour and no defensible salary leaves much of a distribution behind. Nobody says so, because the people writing about S corp elections are mostly selling them.

A day job changes the answer more than anything else

W-2 wages from any employment use up the social security wage base first, and Schedule SE builds it in explicitly: line 8d totals your W-2 social security wages, line 9 is the wage base minus those wages, and line 10 charges the 12.4% part only on the smaller of your net earnings or that remainder.

The base for 2026 is $184,500. So somebody with a $190,000 salary elsewhere has already exhausted the 12.4% part. Their side business pays only the 2.9% Medicare portion, which has no cap.

Put numbers on it. An $80,000 side business with a $40,000 defensible salary: with no day job the election saves about $5,184. With a $190,000 day job it saves about $983. More than four fifths of the benefit disappears, and a comparison that never asked about the day job would have told you the larger figure.

The same logic works upwards. Above the wage base the 12.4% part stops for everyone, so a very profitable business gets a smaller proportional saving than the headline 15.3% implies, because much of its profit was only ever exposed to 2.9%.

Reasonable compensation is the constraint, and it has no number in it

Every dollar you move from salary to distribution saves employment tax, so the arithmetic pushes the salary towards zero. The law does not allow that, and the IRS quotes the Form 1120-S instructions on it: distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.

There is no safe harbour and no percentage. Not 50%, not 60%, not any of the rules of thumb that circulate. What courts actually weigh is your training and experience, your duties and responsibilities, the time you put in, what comparable businesses pay for similar services, what you pay non-shareholder employees, dividend history, how bonuses are timed and paid, and any written compensation agreement or formula.

The consequence of getting it wrong is not a smaller saving, it is a reclassification: the IRS treats the distributions as wages, and the employment tax arrives with penalties and interest attached. The test it applies is whether the corporate income came from the shareholder's personal services, from other employees, or from capital and equipment. A business that is one person and a laptop has a much harder time arguing a low salary than one with fifteen staff and a warehouse.

That is why the calculator above asks what salary you could defend. It cannot tell you, and neither can anything else that has not looked at your business.

What the election costs you in admin

An S corp is a payroll operation. You become an employee of your own company, which means real payroll runs, withholding, federal and state deposits, quarterly filings and a W-2 at the end of it. The corporation files Form 1120-S and issues a Schedule K-1 to every shareholder, and that return is due earlier than a personal one.

What that costs is between you and whoever does it, which is why the calculator takes it as an input rather than guessing. The point is that it is a fixed annual cost set against a saving that scales with the distribution, so there is a profit level below which the election is simply not worth the paperwork, and it is higher than most people expect once the 92.35% is taken into account.

Making the election

Form 2553, signed by all shareholders, no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the preceding tax year. Miss it and there is relief under Rev. Proc. 2013-30 if you have reasonable cause; without that the route is a private letter ruling and a user fee, which costs considerably more than doing it on time.

Eligibility is narrower than people assume: a domestic corporation, no more than 100 shareholders, only individuals and certain trusts or estates as shareholders, and only one class of stock. That last one is what catches a growing business, because it rules out the preferred shares an outside investor will usually want. An election that suited a two-person consultancy can become the thing standing between it and a funding round.

Two things this page leaves out on purpose

State tax. States do not all follow the federal treatment. Several charge an S corp directly through a franchise tax or a minimum fee, and a few do not recognise the election at all. There is no single source publishing all fifty and they move on fifty separate legislative calendars, so a table here would be quietly wrong within a year. The figures above are federal, and they say so.

The qualified business income deduction. This one genuinely matters, because W-2 wages are not qualified business income. An S corp paying you a salary generates less QBI than a sole proprietor with the same profit, which eats into the saving. But the IRS states that the deduction applies for tax years beginning after 31 December 2017 and ending on or before 31 December 2025, and publishes nothing for 2026 either way. Modelling a deduction whose current status cannot be verified from the primary source would be worse than naming the gap, so it is named. Raise it with whoever files your return, because it can move the answer.

Why this is not the same page as sole trader against limited company

A Briton asking the same question is asking about a genuinely different mechanism. They incorporate, the company pays corporation tax on its profit, and the owner takes dividends which carry no National Insurance. Two layers of tax, and the saving comes from the gap between them.

An American electing S corp status adds no second layer at all. The profit is taxed once, in your hands, and the saving comes purely from reclassifying part of it as something FICA does not reach. There is no company-level tax to compare against, which is why our sole trader against limited company page asks about dividend rates and this one does not mention them.

Same instinct, different machinery, and running them through one calculator with a country dropdown would need two entirely separate sets of fields and two sets of figures behind them. That is two pages, not one with a switch.