An LLC is a legal entity. An S corp is a tax election.
They are not alternatives in the way people often think. An LLC is created under state law and gives you liability protection. By default, the IRS taxes a single-member LLC like a sole proprietorship (Schedule C) and a multi-member LLC like a partnership (Form 1065).
An S corp is a way of being taxed. A corporation, or an LLC, can elect it by filing Form 2553. The business then files Form 1120-S and passes profit to its owners on K-1s. See how an S corp election works.
The real difference: self-employment tax
As a sole proprietor or default LLC, nearly all of your profit is subject to self-employment tax of 15.3% (on 92.35% of net earnings, with the 12.4% Social Security part capped at the yearly wage base, $184,500 for 2026).
As an S corp, you pay yourself a reasonable salary through payroll. Payroll taxes apply to that salary. The remaining profit comes to you as distributions, which are not subject to payroll or self-employment tax.
| $180,000 of profit | Default LLC | S corp, $80,000 salary |
|---|---|---|
| Self-employment or payroll tax | $25,433 | $12,240 |
| Difference before costs | $13,193 |
Try your own numbers in the S corp tax calculator.
What it costs to be an S corp
- Payroll: a payroll provider, quarterly payroll filings and state unemployment insurance.
- A separate return: Form 1120-S, due March 15, plus the state version.
- State entity taxes in some states. California, for example, charges 1.5% of S corp net income with an $800 minimum.
Three things the simple math misses
- The QBI deduction. Many owners can deduct up to 20% of qualified business income, but S corp salary is not QBI, so a higher salary can shrink the deduction.
- Retirement contributions. Solo 401(k) employer contributions are based on W-2 salary for an S corp owner, so a very low salary can limit them.
- Reasonable salary. The IRS expects you to pay yourself what the work is worth. See reasonable compensation.
When it usually makes sense
An election is worth a serious look when profit is consistently well above what a reasonable salary for your role would be, so the payroll tax saved clearly outweighs the extra costs. Below that, a default LLC is often simpler and nearly as cheap.