Disclosure: This site may earn a commission from partner links on this page, at no additional cost to you. This article is for educational purposes only and is not tax advice — consult a CPA or tax professional to model your specific numbers before electing S-Corp status.

S-Corp vs. LLC: Which Saves More on Taxes?

The most important thing to understand upfront: this isn’t actually a choice between two different legal entities. An S-Corp is a tax election you can apply to an existing LLC (via IRS Form 2553) — not a separate business structure you form instead of one.

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How LLC Taxation Works by Default

A single-member LLC is, by default, a “disregarded entity” — the IRS treats it the same as a sole proprietorship. All net profit flows to your personal Schedule C, and the entire amount is subject to self-employment tax at 15.3% (12.4% Social Security, up to the annual wage base, plus 2.9% Medicare on all earnings), calculated on 92.35% of net profit.

How an S-Corp Election Changes This

Electing S-Corp taxation splits your income into two categories:

1. A “reasonable salary” — a W-2 wage, subject to the full 15.3% in payroll taxes (split between employer and employee halves)
2. Distributions — the remaining profit, which is not subject to self-employment or payroll tax at all

The tax savings come entirely from that second bucket avoiding the 15.3% hit.

A Worked Example

Say your business nets $100,000 in profit.

As a default LLC: the full $100,000 is subject to self-employment tax, working out to roughly $14,130.

As an S-Corp, with a $50,000 reasonable salary: payroll (FICA) taxes on that $50,000 run approximately $7,650. The remaining $50,000 taken as a distribution avoids the 15.3% entirely.

Net savings: roughly $6,480 per year — before accounting for the added compliance costs below.

The Real Cost of Making the Election

This savings isn’t free. S-Corp status requires:

• Running actual payroll — withholding taxes, filing quarterly Form 941, issuing yourself a W-2
• A separate business tax return — Form 1120-S, generally due March 15
• K-1s issued to each shareholder
• Total added compliance cost: commonly estimated at $1,500–$3,000 per year (payroll service plus additional tax preparation)

The Breakeven Point

This is where sources vary somewhat, though they cluster in a consistent general range: most tax professionals cited put the breakeven point somewhere between $40,000 and $80,000 in annual net business profit, with a common midpoint estimate around $60,000–$75,000. Below that range, the added compliance cost tends to eat up most or all of the tax savings. Above it, the savings grow meaningfully and tend to outweigh the added cost.

The honest takeaway: there’s no single universal number — the real breakeven depends on your specific profit level and what a genuinely defensible “reasonable salary” looks like for your work, which varies by industry, region, and role.

The “Reasonable Salary” Requirement Is Strictly Enforced

This is the part people most often get wrong, and it carries real audit risk. The IRS explicitly checks that your salary reflects genuine market-rate compensation for the work you actually perform — you cannot pay yourself a token $10,000 salary and take $90,000 in distributions to dodge nearly all payroll tax. The IRS has been using data-matching techniques specifically to flag S-Corps where distributions significantly exceed salary relative to industry benchmarks (drawing on Bureau of Labor Statistics wage data). A commonly cited rule of thumb sets salary around 40%–60% of total S-Corp income, when that range aligns with actual market rates for the work — document your salary rationale in writing to defend it if audited.

2026-Specific Figures Worth Knowing

• Social Security wage base: $176,100 for 2026 — income above this threshold is only subject to the 2.9% Medicare portion, not the full 15.3%
• Additional Medicare surtax: an extra 0.9% applies once modified adjusted gross income crosses $200,000 (single) or $250,000 (married filing jointly)
• QBI deduction: both structures can qualify for the 20% Qualified Business Income deduction, but S-Corp salary specifically is not QBI-eligible income — only the distribution portion is

Other S-Corp Requirements Worth Knowing

• Maximum of 100 shareholders
• Shareholders must be U.S. citizens or residents
• Only one class of stock is allowed
• Some states impose additional S-Corp-specific taxes (California’s 1.5% franchise tax, for example)

Frequently Asked Questions

Do I need to form a new business to elect S-Corp status? No — you file Form 2553 to apply the election to your existing LLC (or corporation). The legal entity itself doesn’t change.

What happens if the IRS decides my salary wasn’t reasonable? It can reclassify distributions as wages retroactively, triggering back payroll taxes, penalties, and interest — a real reason to set salary defensibly and document your reasoning.

Is the S-Corp election reversible? Generally yes, though there are specific rules and timing restrictions around revoking or re-electing — worth discussing with a tax professional rather than assuming it’s simple to undo.

Does every state recognize the S-Corp election the same way? No — some states impose their own additional taxes or don’t fully recognize the federal election the same way, so state-specific rules matter alongside the federal calculation.

Should I make this decision myself, or work with a professional? Given how much money turns on correctly setting a defensible reasonable salary and modeling the real breakeven for your specific numbers, having a CPA run this analysis is genuinely worth the cost for most people considering the election.

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That’s how the S-Corp election actually changes your tax picture relative to a default LLC — a real, meaningful savings opportunity above a certain profit level, with real compliance costs to weigh against it. Thanks for reading.