LLC vs S-Corp: When the S-Corp Election Saves Money (2026)

The real comparison is not LLC versus S-corp but an LLC taxed by default versus the same LLC taxed as an S-corp. An LLC is a legal entity formed with your state. An S-corporation is a federal tax classification under Subchapter S of the Internal Revenue Code that an eligible LLC or corporation elects by filing Form 2553 with the IRS. Your operating agreement, liability protection, EIN and bank account stay the same.

What changes when an LLC elects S status:

• The owner becomes an employee of the company and must receive a reasonable salary through payroll, with withholding, Forms 941, 940 and W-2.
• The business files Form 1120-S each year by March 15 and issues K-1s, instead of putting the profit on your Schedule C.
• Profit above the salary passes through to your personal return and is subject to income tax but not to Social Security and Medicare tax.
• The company must follow S-corp eligibility rules: no more than 100 shareholders, all US citizens or residents (or certain trusts and estates), and only one class of stock, which means distributions must follow ownership percentages exactly.

A corporation can also elect S status, so a small business that incorporated can get the same result. For founders deciding which legal entity to form in the first place, start with our entity types guide.

The saving comes from one place: self-employment tax. A default LLC owner pays 15.3% self-employment tax on 92.35% of all net profit (12.4% Social Security up to the 2026 wage base of $184,500, plus 2.9% Medicare with no cap). An S-corp owner pays the same 15.3% (half withheld, half paid by the company) but only on the salary.

The formula for the gross payroll tax saving, when profit is below the wage base:

Saving = 15.3% x (92.35% x profit) minus 15.3% x salary

At $120,000 of profit and a $65,000 salary, that is $16,955 minus $9,945, or about $7,000. This is the number most S-corp articles stop at, and it overstates the benefit. Three things come out of it:

1. Lost QBI deduction. Your salary is not qualified business income, so the 20% §199A deduction applies to a smaller number. In this example the deduction drops from about $19,100 to about $9,600, which costs roughly $2,400 of income tax at the 22% bracket.
2. Compliance cost. Payroll software or service, quarterly and annual payroll filings, state unemployment registration and a Form 1120-S. We assume $2,000 a year in the model; typical market quotes for a one-owner payroll plus an 1120-S fall somewhere between $1,500 and $3,000.
3. State costs. Entity-level S-corp taxes in some states and cities, covered below.

Above the wage base the math changes again. Once salary plus self-employment income would exceed $184,500, the 12.4% portion stops in both structures, so the marginal saving falls to the 2.9% Medicare portion (3.8% above the additional Medicare threshold). That is why the S election matters most for owners earning roughly $80,000 to $300,000.

We modeled a single owner, filing single with no other income, using 2026 federal brackets, the $16,100 standard deduction, the QBI deduction (all cases below the $201,750 threshold), the $184,500 wage base, $42 of FUTA and $2,000 a year of S-corp compliance cost. The salaries are illustrations of what might be defensible, not recommendations. State taxes are excluded.

Read the table this way: under these assumptions the election loses money below about $65,000 of profit, roughly breaks even around $70,000, and becomes clearly worthwhile from about $100,000. A higher salary moves the break-even up; every extra $10,000 of salary costs about $1,530 of payroll tax and gives back some QBI deduction.

Our decision rule: elect S status when you expect at least $80,000 of profit after expenses for the next two years and can pay a defensible salary out of it. One good year is not enough, because the costs recur and revoking the election locks you out for 5 years. Use our S-corp tax savings calculator with your own profit, salary and state.

An S-corp owner who works in the business must take a salary that is reasonable for the services performed, before or alongside any distributions. Neither the Code nor the regulations set a number; courts decide on the facts. IRS Fact Sheet 2008-25 lists the factors courts use:

• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• Dividend (distribution) history
• Payments to non-shareholder employees
• Timing and manner of paying bonuses to key people
• What comparable businesses pay for similar services
• Compensation agreements and any formula used

The leading case is David E. Watson, P.C. v. United States (8th Cir. 2012). A CPA with about 20 years of experience paid himself $24,000 a year and took the rest of the firm’s profit as distributions. The court agreed with the IRS expert that reasonable pay was $91,044 and assessed employment tax on the $67,044 difference.

What examiners look at first: a salary of zero or a token amount with large distributions; a salary far below the market wage for the role in your city; distributions paid before any salary; and an owner who is the company’s only revenue producer. A one-person consultancy that bills $180,000 and pays its owner $30,000 is the classic audit profile.

How to set it: price the jobs you actually do (for example 70% senior developer, 30% general manager) using public wage data such as the Bureau of Labor Statistics occupational wage survey for your metro area, write the reasoning down, and review it each year. The so-called 60/40 rule, salary at 60% of profit, has no legal basis; it is sometimes reasonable and sometimes not. Paying a salary the business cannot afford in a bad year is not required, but the reasoning should be documented.

Beyond the $1,500 to $3,000 of typical annual compliance cost, an S-corp changes several personal tax items, some in your favor and some not.

• Payroll filings. Quarterly Form 941, annual Form 940 and W-2, state withholding and unemployment returns. Payroll deposits run on a fixed schedule, and late deposit penalties start at 2%.
• State unemployment tax on your own salary. Rates and wage bases vary by state; some states let corporate officers opt out.
• Health insurance. Premiums for a more-than-2% shareholder must be added to the owner’s W-2 wages (exempt from Social Security and Medicare), then deducted on the owner’s Form 1040. Paid directly by you with no W-2 reporting, they are not deductible.
• Retirement contributions. Solo 401(k) employer contributions are capped at 25% of W-2 salary. A low salary lowers the maximum you can put away, which can cost more in deferred tax than the payroll tax saved.
• Social Security benefits. Less wage income means lower credited earnings for future Social Security benefits.
• Losses. S-corp losses are deductible only up to your stock basis plus loans you personally made to the company. Bank debt the company owes does not add to your basis, unlike in a partnership.
• Distributions must be pro rata. Two owners cannot agree that one takes 70% of profit in a year while owning 50%. That breaks the single-class-of-stock rule and can terminate the election.

None of these is a reason not to elect on its own, but each belongs in the decision, especially the retirement cap for owners who max out their 401(k).

Most states follow the federal S election, but several tax the S-corp itself or ignore the election entirely. Check your state before filing Form 2553.

• California: S-corps pay 1.5% of California net income at the entity level, with an $800 minimum. A default LLC pays the $800 annual tax plus a gross receipts fee only once California receipts reach $250,000. In the $120,000 example above, the S-corp’s income after salary is about $48,000, so 1.5% is about $720 and the $800 minimum applies, the same as the LLC. At $200,000 of profit the S-corp tax is about $1,516, roughly $716 more than the LLC. Newly formed corporations that incorporate or qualify through the California Secretary of State do not owe the minimum in their first year, but still pay the 1.5% on income; that first-year exemption does not apply to LLCs.
• New York City: the city does not recognize the S election. A federal S-corp doing business in NYC pays the General Corporation Tax, generally 8.85% of its NYC income (the highest of several bases), before any credits. On about $48,000 of post-salary income that is roughly $4,250, more than the entire federal saving at $120,000 of profit. For many NYC service businesses the election only works at higher profit levels.
• New York State: requires its own S election on Form CT-6, signed by all shareholders and filed by March 15 for a calendar-year company. Without it, most federal S-corps are taxed as C-corps by the state.
• Tennessee and Texas: franchise taxes apply to LLCs and S-corps alike, so they do not change the comparison.

If you are in California or New York City, run the state numbers before the federal ones.

File Form 2553 no more than 2 months and 15 days after the beginning of the tax year you want the election to apply to, or at any time during the prior tax year. The 2-month period starts on the day the tax year begins.

• Existing calendar-year LLC electing for 2027: file at any time in 2026, or by Monday, March 15, 2027.
• New business formed February 9, 2027: the first tax year begins that day, the 2-month period ends April 8, and the deadline is Friday, April 23, 2027.
• Missed it for the current year: a Form 2553 filed after the deadline is treated as an election for the following year unless you request relief.

All shareholders must sign the consent, including a spouse with a community property interest. The IRS normally sends an acceptance notice (CP261) within about 60 days; keep it permanently, because lenders and future buyers ask for it.

Late election relief under Rev. Proc. 2013-30. If you meant to be an S-corp from a certain date, the only problem is the late filing, and you had reasonable cause, you can usually get relief without a private letter ruling:

1. Request it within 3 years and 75 days of the intended effective date.
2. Write 'FILED PURSUANT TO REV. PROC. 2013-30' at the top of Form 2553.
3. Attach a reasonable-cause statement explaining why the election was late and that you acted diligently once you found out.
4. Include statements from all shareholders during the period that they reported consistently with S status.
5. File it with the current-year Form 1120-S or separately with the IRS service center, as the instructions direct.

Filing an extension for the 1120-S does not extend the 3-year-and-75-day window. Corporations that have filed every return as an S-corp can sometimes get relief beyond that window under section 5.04 of the procedure. Outside these rules, the only route is a private letter ruling with a user fee of several thousand dollars.

Do not elect S status, or revoke it, in any of these situations:

• Profit below about $70,000, or highly variable. The table shows the election loses money at low profit, and costs recur in bad years.
• You plan to raise venture capital in the next year or two. Investors require a C-corp with preferred stock, which an S-corp cannot issue. Stock issued while the company is an S-corp can never qualify for QSBS, so converting later forfeits the exclusion on founder shares issued before the conversion.
• Any owner is a nonresident alien, a corporation, a partnership or most kinds of LLC. They are ineligible shareholders, and the election terminates the day one acquires shares.
• Owners want non-pro-rata economics. Preferred returns, carried interests and special allocations need a partnership.
• You expect losses funded by company debt. Partnership owners get basis for entity debt; S-corp owners do not.
• The business holds appreciating real estate. Distributing appreciated property out of an S-corp triggers gain, and an S-corp cannot do a tax-free distribution the way a partnership often can.
• You operate in New York City, unless profit is high enough to absorb the General Corporation Tax.
• You want to maximize retirement contributions on a low salary.

Revoking requires consent of shareholders holding more than half the shares, and once the election ends you generally cannot re-elect for 5 years. Treat the decision as a multi-year one.

Elect if you can answer yes to every item:

1. Expected profit after all expenses is at least $80,000 this year and next.
2. You can pay yourself a documented, market-based salary and still have profit left to distribute.
3. Every owner is a US citizen or resident individual (or an eligible trust or estate).
4. Owners will split profit strictly by ownership percentage.
5. You do not plan to raise venture money or grant preferred stock in the next two years.
6. Your state and city follow the S election without an entity tax that cancels the saving.
7. You are ready to run payroll every pay period and file Form 1120-S by March 15.

If you answered yes to all seven, file Form 2553 before the deadline for the year you want it to apply to, set up payroll before the first distribution, and set a calendar reminder to review the salary every December. If two or more answers were no, stay a default LLC and revisit when profit or ownership changes.

These break-even figures are a federal model with stated assumptions as of October 2026. They are not tax advice for your specific facts; your state, other household income, retirement plans and health insurance all move the result, so run your own numbers or ask us to before you file.