LLC vs S Corp: What You Are Actually Choosing Between

The question is asked several hundred thousand times a month and it contains a mistake. An LLC and an S corporation are not two options on the same menu. An LLC is a legal entity you create by filing with a secretary of state. An S corporation is a federal tax classification you elect by filing a form with the IRS. One is who you are; the other is how you are taxed. Most people who ask the question end up with both: an LLC that has made an S election.

So the useful version of the question is narrower. Should your LLC keep its default tax treatment, or should it elect to be taxed as an S corporation? That is a real decision with real trade-offs, and it is what this page compares.

The category error, and why it costs money

No state issues an S corporation. You cannot register one, and there is no box on a formation document that creates one. Subchapter S is a section of the Internal Revenue Code, and an eligible entity opts into it by filing Form 2553. Until that form is filed and accepted, your business is taxed under its default rules no matter what your accountant, your bookkeeper or your bank calls it.

That leaves three configurations that people loosely describe as "LLC vs S corp":

• An LLC with default tax treatment. One owner: disregarded, reported on Schedule C. Two or more: a partnership, filing Form 1065 and issuing K-1s. No payroll for the owners.
• An LLC that has elected S status. Legally identical to the above. Taxed under subchapter S: the owners become employees, take a salary through payroll, and receive the rest of the profit as distributions.
• A corporation that has elected S status. Same tax result, but with corporate law attached — bylaws, shares, directors, minutes.

So this is rarely a fork in the road. Forming an LLC now and electing S status in a later year, once the profit justifies it, is the normal path rather than a compromise.

What actually changes: employment tax

Income tax treatment barely moves. Both a default-taxed LLC and an S corporation are pass-through entities: neither pays federal income tax itself, and profit lands on the owners' personal returns at their own rates. The difference is employment tax.

As the owner of a default-taxed LLC you pay self-employment tax on 92.35% of your net profit. The rate is 15.3% — 12.4% Social Security, which stops once your earnings reach the wage base of $184,500 for 2026, and 2.9% Medicare, which never stops. Above $200,000 (single or head of household), $250,000 (married filing jointly) or $125,000 (married filing separately) an extra 0.9% Additional Medicare Tax applies. Those three thresholds are fixed in statute and are not indexed for inflation, so more owners cross them every year.

Under an S election, only your salary carries employment tax: 7.65% withheld from you, 7.65% paid by the company, plus roughly $42 a year of federal unemployment tax. The remaining profit, taken as a distribution, carries none. That gap is the entire financial case for the election.

Which is why the salary figure is not yours to pick freely. There is no percentage rule, and the "60/40 split" repeated across the internet has no basis in statute, regulation or case law. The standard is what you would have to pay someone else to do the work you do. Reasonable compensation is the single most examined number on an 1120-S.

Side by side

The Section 199A interaction that changes the answer

The qualified business income deduction is 20% of pass-through profit, and the One Big Beautiful Bill Act made it permanent — the sunset that had been scheduled after 2025 was repealed, so any article telling you it expires is out of date. What most comparisons still miss is that §199A pulls in opposite directions depending on your income.

Below the threshold, wages work against you

Salary is a deduction to the company, so every dollar you move from distribution to salary reduces qualified business income by a dollar, and your 20% deduction shrinks with it. The extra income tax claws back roughly a third of the headline payroll-tax saving for a typical owner. It is not fatal, but a comparison that ignores it overstates the benefit by about 30%.

Above the threshold, the sign flips

Once taxable income passes $403,500 (joint) or $201,750 (most other returns), the wage limitation phases in, and it is fully applied by $553,500 and $276,750 respectively. From that point the deduction is capped at 50% of W-2 wages the business paid. A sole proprietor pays no W-2 wages at all, so the cap squeezes their deduction toward zero. An S corporation that runs payroll keeps up to half of what it paid.

What you give up

The tax saving is quantifiable. The costs are not all financial, and they are the part of the comparison that gets skipped.

• Flexible profit splits disappear. A partnership-taxed LLC can allocate profit differently from capital, and can pay one member a distribution without paying the others. An S corporation must allocate and distribute strictly in proportion to ownership. A disproportionate distribution can be argued to create a second class of stock, which terminates the election.
• Your investor pool narrows. No partnership, LLC, corporation or non-resident alien may hold shares. If a fund might invest, or a co-founder is not a US person, the election is off the table.
• You lose basis for entity-level debt. LLC members include their share of the entity's liabilities in basis and can deduct losses against it. S corporation shareholders cannot — only loans made personally to the company count. For a leveraged or loss-making business this can strand deductions for years.
• Your retirement ceiling is tied to your salary. Employer profit-sharing contributions are capped at 25% of W-2 wages in an S corporation. Drive the salary down to save employment tax and you shrink the amount you can shelter.
• Owner health insurance runs through payroll. Premiums for a more-than-2% shareholder must be reported on the W-2 rather than simply paid by the company — a compliance step, not a tax hit, but one that catches first-year owners.
• It is not easy to undo. After revoking an S election, an entity generally must wait five tax years before electing again without IRS consent.

Which should you choose

The answer depends almost entirely on net profit: what is left after every business expense, not revenue.

Under about $50,000 of profit

Stay a default-taxed LLC. The payroll service, the incremental cost of an 1120-S over a Schedule C and the §199A clawback together consume the saving, and you have bought yourself quarterly filings for nothing.

Roughly $50,000 to $80,000

Genuinely marginal, and it turns on your state, your salary and whether you will keep on top of payroll. A saving of $1,500 a year is real money, but not if a missed Form 941 generates penalties that erase it.

Roughly $80,000 to $200,000

This is the band where the election earns its keep for most owner-operators. The distribution portion is large enough that the employment tax saved clearly exceeds the compliance cost, and you are below the §199A threshold, so the deduction is not yet at risk. Is an S corp worth it works through the arithmetic case by case.

Above the §199A threshold

Still usually yes, but for a different reason and with the opposite salary strategy. Your salary may already be past the $184,500 Social Security wage base, in which case the marginal employment tax saving on further wages is only the 2.9% Medicare rate plus any 0.9% Additional Medicare Tax — note that taxable income above the §199A threshold does not by itself mean your salary is above the wage base. Meanwhile the wage limitation makes W-2 wages the thing protecting your deduction. Run the numbers before assuming a lower salary is better.

Any profit, if the ownership does not fit

If you have a non-resident co-founder, an entity member, an operating agreement with a preferred return, or plans to raise from a fund, the answer is no regardless of profit. Eligibility is a gate, not a preference.

The state layer, which can reverse the decision

Federal math is only part of it. New York requires a separate election on Form CT-6 that must be approved — filing Form 2553 alone does not create a New York S corporation, and it is the most expensive S-corp mistake in the country. California charges a 1.5% S-corporation franchise tax with an $800 annual minimum, payable even in a loss year. Tennessee does not recognize S status for franchise and excise tax at all.

Two widely repeated claims are now wrong. New Jersey eliminated its separate election for privilege periods beginning on or after December 22, 2022, so Form CBT-2553 is no longer required. Arkansas Form AR1103 has been obsolete since tax years beginning January 1, 2018; recognition there is automatic. Check the S-corp rules in your state before you decide.

And S corporation versus C corporation

A C corporation is the default for any corporation that has not elected S status. It pays a flat 21% federal tax on its own profit, and shareholders pay again on dividends. That second layer is why most small businesses avoid it, but it is not always the wrong answer.

An LLC can elect C corporation treatment too, using Form 8832. If you want subchapter S, you do not need Form 8832 first — a timely Form 2553 carries the classification election with it, and filing both is a mistake. Form 8832 vs Form 2553 sets out the narrow case where the two forms genuinely appear together.

If the answer is yes, mind the calendar

An election takes effect no earlier than the tax year for which it is timely filed. For an existing calendar-year business, that meant filing by March 16, 2026 for the 2026 tax year — a date that has passed. The window for the 2027 tax year is open now and runs to March 15, 2027, and filing early is allowed — how to file Form 2553 walks through the procedure end to end.

If you want S treatment for 2026 you are not out of options: missing the deadline does not void the form. Under IRC §1362(b)(3) a late election is simply treated as an election for the following year unless you request relief under Rev. Proc. 2013-30, which is available for three years and 75 days after the effective date. The deadline guide explains how the two-month-and-fifteen-day count actually works, including for entities formed mid-year.