LLC vs S Corp in 2026: Which Saves You More Tax?

"Should my LLC be an S corp?" is one of the most common questions small business owners ask their accountants once the business starts making real money. The answer depends on your profit, the salary you can justify, your state and how much admin you're willing to take on. This guide explains the difference between an LLC and an S corp, how the election works, the reasonable-salary rule, and what you'd actually save in 2026, using a full worked example that also counts the effect on your qualified business income (QBI) deduction. Figures were checked against IRS and state sources in October 2026.

Quick answer

An LLC is a legal structure you form with your state; an S corp is a federal tax election your LLC (or corporation) can make with Form 2553. As an S corp, you pay yourself a reasonable salary through payroll and take the rest as distributions that aren't subject to the 15.3% self-employment tax. That can save thousands once profit is well above a market salary, but payroll, a separate return and a smaller QBI deduction eat into the savings.

• File Form 2553 no more than 2 months and 15 days after the start of the tax year for the election to cover the current year

• Salary must be reasonable for your work; distributions skip Social Security and Medicare tax

• In our example, $120,000 of profit saves about $5,160 in combined federal tax before admin costs

• S corp salary isn't QBI, so your 20% QBI deduction usually shrinks

• Some places tax S corps anyway: California charges 1.5% of net income, and New York City ignores the election

LLC vs S corp: what's the actual difference?

An LLC (limited liability company) is created under state law when you file articles of organization. It separates your personal assets from business debts and lawsuits. An S corporation isn't a type of company you form; it's a tax classification under Subchapter S of the Internal Revenue Code that a corporation or an eligible LLC elects.

By default, the IRS treats a single-member LLC as a disregarded entity (you report profit on Schedule C) and a multi-member LLC as a partnership. In both cases, active owners pay self-employment tax on their share of profit. When an LLC elects S status, it keeps its state LLC structure and liability protection, but for federal income tax it's taxed as an S corporation: it files its own return, pays owners who work in the business through payroll, and passes the remaining profit to owners on Schedule K-1.

If you haven't formed your company yet, start with our LLC registration guide; you can elect S status later.

Who can elect S corp status

Your LLC or corporation can elect S treatment only if it meets every requirement on the Form 2553 instructions:

• It's a domestic corporation or an eligible entity, such as a US LLC.
• It has no more than 100 shareholders (family members can be counted as one).
• It has one class of stock, so every owner's distributions must be proportional to ownership. Differences in voting rights alone are allowed.
• Shareholders are only individuals, estates and certain trusts; no partnerships, corporations or nonresident aliens.
• It isn't an ineligible corporation, such as certain banks and insurance companies.

The one-class-of-stock rule trips up multi-member LLCs whose operating agreements give one partner a bigger share of profit than their ownership percentage. If you elect, those special allocations have to go, so review the agreement first.

How the S corp election works: Form 2553

The election is a two-page IRS form plus shareholder consents. The current Form 2553 is the December 2017 revision, with instructions revised December 2020.

Electing S corp status for an existing LLC

1. 1

   Check eligibility and your operating agreement

   Confirm every owner is an eligible shareholder and that profit is split by ownership percentage.

2. 2

   Pick the effective date and watch the deadline

   File no more than 2 months and 15 days after the start of the tax year you want the election to start, or any time in the previous year. For a calendar-year business, that means by March 15 of the year the election starts.

   Tip: An LLC filing Form 2553 doesn't also need Form 8832; it's treated as electing corporate status.

3. 3

   Get every owner's signed consent

   Each shareholder (and spouse, in community property states) signs the consent statement on the form. Missing signatures are a common reason for rejection.

4. 4

   File by fax or mail

   Send the form to the IRS service center for your state listed in the instructions. The instructions list a Kansas City fax (855-887-7734) for eastern states and an Ogden fax (855-214-7520) for western states; check which applies to you.

   Form 2553 instructions
5. 5

   Wait for the IRS acceptance letter and set up payroll

   Keep the IRS acceptance letter with your records, register for state payroll accounts, and run your first salary payment.

Missed the deadline? Rev. Proc. 2013-30 gives relief if you file within 3 years and 75 days of the date you wanted the election to start and can show reasonable cause, with the required statement written at the top of the form.

The reasonable salary rule

The savings come from splitting profit into salary (taxed for Social Security and Medicare) and distributions (not). The IRS knows this, so it requires that any S corp officer who works in the business be paid reasonable compensation before taking distributions. If you pay yourself too little, the IRS can recharacterize distributions as wages and assess back payroll taxes, interest and penalties.

There's no IRS percentage or formula. The IRS lists factors courts have used, including:

• Your training and experience, duties and responsibilities, and time devoted to the business
• What comparable businesses pay for similar services
• What you pay non-owner employees
• Dividend history and how bonuses are timed
• Any compensation agreements or formula you use

The IRS also points out that profit can come from three sources: your personal services, other employees' work, and capital such as equipment. Income from your own services should be wages. A solo consultant whose profit is almost entirely their own labor has a weaker case for a low salary than a shop owner with five staff and significant equipment.

Practical approach: look up what employers pay for your role and region, document your hours and duties, and set your salary in that range. Our salary slip generator helps you keep clean pay records.

If the S corp pays health insurance premiums for an owner with more than 2% of the shares, those premiums go on the owner's W-2 as wages for income tax but aren't subject to Social Security and Medicare when paid under a plan for employees.

Worked example: what an S corp election saves in 2026

Take Maria, a single web designer with an LLC making $120,000 of net profit in 2026, no other income, taking the standard deduction of $16,100. She considers electing S status and paying herself a $60,000 salary, which matches local market data for her role.

As a default LLC (sole proprietor):

• Self-employment tax: $120,000 × 92.35% = $110,820 × 15.3% = $16,955
• Half of SE tax is deductible: $8,478, so adjusted gross income is $111,522
• QBI deduction: 20% of QBI, capped at 20% of taxable income before QBI ($95,422) = $19,084
• Taxable income: $76,338, federal income tax about $11,506
• Total federal tax: about $28,462

As an S corp:

• Payroll tax on salary: $60,000 × 15.3% = $9,180 ($4,590 withheld from Maria, $4,590 paid by the company)
• The company's share is a business expense, so K-1 profit is $120,000 − $60,000 − $4,590 = $55,410
• Adjusted gross income: $60,000 + $55,410 = $115,410
• QBI deduction: 20% of the $55,410 K-1 profit only = $11,082
• Taxable income: $88,228, federal income tax about $14,122
• Total federal tax: about $23,302

Maria's result (2026 rules)

$7,775

Payroll tax saved

$16,955 SE tax vs $9,180 FICA

$2,616

Extra income tax

Smaller QBI deduction and higher AGI

≈ $5,160

Net federal saving

Before payroll, return-prep and state costs

Maria's taxable income stays inside the 22% bracket ($50,400–$105,700 for single filers in 2026) in both scenarios. From the $5,160 she still has to subtract the costs of being an S corp: a payroll service, the extra Form 1120-S preparation fee, federal unemployment tax (0.6% of the first $7,000 of wages after the state credit, so $42), state unemployment insurance and any state entity tax.

Here's how the payroll tax saving alone scales with profit and salary. Income tax effects aren't included.

At $200,000 of profit, the LLC owner's net earnings ($184,700) slightly exceed the 2026 Social Security wage base of $184,500, so only Medicare applies above that line. At $60,000, the saving is often wiped out by payroll and accounting costs. Run your own figures with the federal tax calculator.

The QBI deduction after the One Big Beautiful Bill

The Section 199A qualified business income deduction lets owners of pass-through businesses (sole proprietors, partners and S corp shareholders) deduct up to 20% of their qualified business income. It was scheduled to expire after 2025; the One Big Beautiful Bill Act (OBBBA), enacted in July 2025, made it permanent. From tax years beginning in 2026:

• The phase-in ranges widen to $75,000 (single) and $150,000 (joint) above the threshold. For 2026, limits start at $201,750 of taxable income for single filers (phasing in fully at $276,750) and $403,500 for joint filers (fully at $553,500).
• A new minimum deduction of $400 applies if you have at least $1,000 of QBI from businesses you materially participate in. Both amounts are indexed after 2026.

Why it matters for this decision: S corp wages paid to you are not QBI. Every dollar you move from profit into salary saves payroll tax but removes that dollar from your QBI base, as Maria's example shows. Above the threshold, though, the picture can flip: if you're in a non-service business, the deduction may be limited by W-2 wages the business pays, and your own S corp salary counts toward that limit. Owners in specified service trades (such as consulting, law, health and accounting) lose the deduction entirely above the phase-in range. If your income is near these levels, have a tax professional model both options.

State and local taxes that change the math

The federal saving is only half the story. Check your state's treatment before you elect:

• California: S corporations pay a 1.5% franchise tax on net income, with an $800 minimum, even in the first year. That 1.5% on Maria's $55,410 of profit would be about $831.
• New York City: NYC doesn't recognize S elections. S corporations doing business in the city pay the General Corporation Tax, which can cancel much of the federal saving.
• New York State: a federal S corp must file a separate election (Form CT-6) to be treated as an S corp for state tax.
• Texas: LLCs and corporations both owe franchise tax reports, but no tax is due below the $2.65 million revenue threshold, so the S election doesn't change much there.
• All states: running payroll means registering for state withholding (where there's an income tax) and state unemployment insurance.

When an S corp pays off, and when it doesn't

An S corp election is worth modeling if…

0/6

• Your business has steady net profit well above a market salary for your role
• You expect that level of profit to continue, not a one-off year
• You can justify and document a reasonable salary
• Your state or city doesn't add an entity tax that offsets the saving
• All owners are eligible shareholders and profit is split by ownership
• You're ready to run payroll and file Form 1120-S by the 15th day of the 3rd month after year-end

Share Print

It usually doesn't pay off if profit is modest or erratic, if your reasonable salary would eat most of the profit, if you're in New York City, or if the business may bring in investors or partners who need special allocations. It also adds deadlines: the 1120-S is due March 15 for calendar-year companies (March 16 in 2026, because the 15th fell on a weekend), and filing late triggers penalties.

Mistakes to avoid

• Electing too early. In the start-up years, low profits mean little saving and real admin costs.
• Paying yourself nothing. Taking only distributions is the classic audit trigger.
• Forgetting the K-1 changes your estimated taxes. Salary has withholding; K-1 profit doesn't, so you may still owe quarterly estimates.
• Ignoring the one-class-of-stock rule. Non-proportional distributions can terminate the election.

Official links

• IRS — About Form 2553Form and instructions
• IRS — Instructions for Form 2553Deadlines, eligibility, where to file, late relief
• IRS — S corporationsFiling requirements
• IRS — S corporation compensationReasonable salary factors
• IRS — Instructions for Form 1120-SAnnual S corp return
• California FTB — S corporations1.5% tax and $800 minimum
• NYC Finance — General Corporation TaxS corporations in New York City

What to do next

Pull last year's profit and this year's year-to-date figure, then model your own version of Maria's example with the federal tax calculator, including a defensible salary and your state's entity tax. If the net saving clears your payroll and accounting costs by a comfortable margin, file Form 2553 before the deadline for the year you want. If you're still setting up, see our guides to getting an EIN and filing business taxes.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

Is an S corp better than an LLC?

They aren't alternatives in the way most people think. An LLC is a legal entity formed under state law; an S corporation is a federal tax status. An LLC can keep its default tax treatment or elect S corp taxation with Form 2553. The S election usually pays off only when profit is high enough that payroll tax saved on distributions outweighs the cost of running payroll and a separate return.

How much salary do I have to pay myself in an S corp?

The IRS requires reasonable compensation for the services you provide, before you take distributions. There's no fixed percentage. Courts look at your training, duties, hours, what comparable businesses pay for similar work, what you pay non-owner staff and how you've paid dividends. Base the figure on market pay data for your role and keep the evidence in your records.

What is the deadline to file Form 2553?

To have the S election apply to the current tax year, file Form 2553 no more than 2 months and 15 days after the start of the tax year, or at any time during the preceding tax year. If you miss it, Rev. Proc. 2013-30 offers relief if you file within 3 years and 75 days of the intended effective date and have reasonable cause.

Does an S corp still get the QBI deduction after the One Big Beautiful Bill?

Yes. The One Big Beautiful Bill Act made the 20% qualified business income deduction permanent and widened the phase-in ranges from 2026. S corp profit passed through on your K-1 can qualify, but the salary the S corp pays you is wages, not QBI. That's why an S election can shrink your QBI deduction even while it cuts payroll tax.

Do I need a new EIN or a new company to become an S corp?

No. An existing LLC files Form 2553 with the IRS under its current EIN; it doesn't need to form a corporation or file Form 8832 first, because an eligible LLC filing Form 2553 is treated as electing corporate classification. Your state LLC registration stays the same, though some states and cities tax S corporations differently.

Can a single-member LLC be an S corp?

Yes. A single-member LLC is a disregarded entity by default, but it can elect S corp taxation with Form 2553 if its owner is an eligible shareholder, such as a US citizen or resident individual. After the election, the LLC runs payroll for the owner, files Form 1120-S each year and issues a Schedule K-1.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 7 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Instructions for Form 2553 — Internal Revenue Service · accessed 7 October 2026
2. 2.About Form 2553, Election by a Small Business Corporation — Internal Revenue Service · accessed 7 October 2026
3. 3.S corporations — Internal Revenue Service · accessed 7 October 2026
4. 4.S corporation compensation and medical insurance issues — Internal Revenue Service · accessed 7 October 2026
5. 5.Limited liability company (LLC) — Internal Revenue Service · accessed 7 October 2026
6. 6.Rev. Proc. 2025-32 (2026 inflation adjustments) — Internal Revenue Service · accessed 7 October 2026
7. 7.Understanding the Working Families Tax Cuts: Business tax provisions — Internal Revenue Service · accessed 7 October 2026
8. 8.Instructions for Form 1120-S — Internal Revenue Service · accessed 7 October 2026
9. 9.Topic no. 759, Form 940 — FUTA — Internal Revenue Service · accessed 7 October 2026
10. 10.S corporations — California Franchise Tax Board · accessed 7 October 2026
11. 11.Business General Corporation Tax (GCT) — NYC Department of Finance · accessed 7 October 2026