S Corp vs LLC 2026: Complete Tax Comparison for Small Business Owners

Published: February 3, 2026 Tax Year: 2026

A Message from Slava

The S Corp question comes up in almost every conversation I have with small business owners. "Should I elect S Corp status?" is right up there with "Do I need an LLC?" as the most common question I hear.

At Anna Money, where we served 60,000+ small businesses across the UK, I saw a similar pattern: business owners either jumped into complex structures too early or stayed in simple ones too long. Both mistakes cost real money.

When I launched Jupid, I structured it as an LLC. The S Corp election came later, once revenue justified the added complexity of running payroll and filing a separate corporate return. That timing matters more than most guides acknowledge.

Here's what I've learned from watching thousands of business owners make this decision: the S Corp election is one of the most powerful tax-saving tools available to profitable small businesses, but it's not free. There's a real cost in complexity, compliance, and professional fees. The math needs to work in your favor before you flip that switch.

This guide breaks down exactly when the S Corp election saves you money, when it doesn't, and how to calculate the breakeven point for your specific situation.

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Executive Summary: S Corp vs LLC in 2026

The core difference: An LLC is a legal business structure. An S Corp is a tax election. You don't choose one or the other — you form an LLC, then optionally elect S Corp tax treatment.

The tax savings mechanism: As a default LLC, you pay 15.3% self-employment tax on every dollar of net profit. With an S Corp election, you pay yourself a "reasonable salary" (subject to payroll taxes) and take remaining profit as distributions — which skip the 15.3% self-employment tax entirely.

Legal basis: IRC §1361 (S Corp eligibility), IRC §1362 (S Corp election), IRS Form 2553, IRS Publication 542

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What Is an LLC?

A Limited Liability Company is a state-level legal structure that separates your personal assets from your business. You form it by filing articles of organization with your state and paying a filing fee ($35-$500 depending on the state).

For federal tax purposes, the IRS treats a single-member LLC as a "disregarded entity." That means you report all income and expenses on Schedule C attached to your personal Form 1040. The business doesn't file its own tax return.

Tax treatment by default:

• All net profit is subject to self-employment tax (15.3%)
• All net profit flows to your personal return as ordinary income
• You pay both the employer and employee portions of FICA
• No payroll required — you take owner draws

For a deeper comparison of LLCs with sole proprietorships, see our sole proprietorship vs LLC guide.

Legal citation: IRC §301.7701-3 governs default entity classification for LLCs.

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What Is an S Corp?

An S Corporation is not a type of business entity — it's a federal tax classification. You don't "form" an S Corp. Instead, you form an LLC (or corporation), then file Form 2553 with the IRS to elect S Corp tax treatment.

Once elected, the IRS treats your LLC differently:

• The business files its own tax return (Form 1120-S)
• Profit passes through to your personal return via Schedule K-1
• You must pay yourself a reasonable salary via W-2 payroll
• Profit above your salary passes through as distributions — not subject to self-employment tax

That last point is where the savings happen. The gap between your reasonable salary and your total profit escapes the 15.3% self-employment tax.

S Corp Eligibility Requirements

Not every business can elect S Corp status. IRC §1361 sets these requirements:

• Domestic entity — Must be a U.S. business
• Eligible shareholders — Individuals, certain trusts, and estates only (no partnerships, corporations, or non-resident aliens)
• Maximum 100 shareholders — Family members can elect to count as one
• One class of stock — All shares must have identical rights to distributions and liquidation proceeds
• Not an ineligible corporation — Certain financial institutions, insurance companies, and DISCs cannot elect S Corp status

For most single-member LLCs and small partnerships, these requirements aren't an issue.

Legal citation: IRC §1361(b) defines S Corporation eligibility requirements.

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How the S Corp Tax Savings Work

The self-employment tax rate for 2026 is 15.3% — that's 12.4% for Social Security (on income up to $176,100) plus 2.9% for Medicare (no income cap). As a default LLC, you owe this on every dollar of net profit.

With an S Corp election, here's what changes:

1. You pay yourself a W-2 salary — This salary is subject to payroll taxes (the employer and employee shares of FICA, totaling 15.3%)
2. Remaining profit passes through as distributions — These distributions are NOT subject to self-employment tax or payroll taxes
3. Both salary and distributions are still subject to federal and state income tax

The savings come entirely from the distributions that skip FICA.

The Math at Three Income Levels

Assumptions: Single filer, standard deduction ($15,700), no other income.

At $60,000 Net Profit:

LLC (Default):
  Self-employment tax: $60,000 × 92.35% × 15.3% = $8,478
  Deductible half of SE tax: $4,239
  AGI: $55,761
  Taxable income: $40,061
  Federal income tax: ~$4,576
  TOTAL FEDERAL TAX: $13,054

S Corp Election:
  Reasonable salary: $40,000
  Payroll taxes (employer + employee): $40,000 × 15.3% = $6,120
  Distribution: $20,000 (no FICA)
  Federal income tax on ~$57,000: ~$5,100
  TOTAL FEDERAL TAX: $11,220

  S Corp savings: ~$1,834/year
  Minus added costs (~$2,000 payroll + tax prep): NET LOSS of ~$166

At $100,000 Net Profit:

LLC (Default):
  Self-employment tax: $100,000 × 92.35% × 15.3% = $14,130
  TOTAL FEDERAL TAX: ~$26,787

S Corp Election:
  Reasonable salary: $60,000
  Payroll taxes: $60,000 × 15.3% = $9,180
  Distribution: $40,000 (no FICA)
  Federal income tax on ~$95,400: ~$13,600
  TOTAL FEDERAL TAX: ~$22,780

  S Corp savings: ~$4,007/year
  Minus added costs (~$2,500): NET SAVINGS of ~$1,507

At $200,000 Net Profit:

LLC (Default):
  Self-employment tax: $200,000 × 92.35% × 15.3% = $28,259
  TOTAL FEDERAL TAX: ~$59,659

S Corp Election:
  Reasonable salary: $90,000
  Payroll taxes: $90,000 × 15.3% = $13,770
  Distribution: $110,000 (no FICA)
  Federal income tax on ~$195,000: ~$35,400
  TOTAL FEDERAL TAX: ~$49,170

  S Corp savings: ~$10,489/year
  Minus added costs (~$3,000): NET SAVINGS of ~$7,489

The pattern: Below about $50,000-60,000 in net profit, the tax savings from an S Corp election get eaten up by the added costs of payroll processing and a more complex tax return. Above that threshold, the savings grow rapidly with income.

Use our Self-Employment Tax Calculator to see your current tax burden and estimate potential S Corp savings.

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The "Reasonable Salary" Requirement

This is the most scrutinized part of S Corp taxation. The IRS requires S Corp owner-employees to pay themselves a "reasonable salary" before taking distributions. You cannot set your salary at $10,000 and take $190,000 in distributions to minimize payroll taxes.

What Counts as Reasonable?

The IRS doesn't publish a specific number or formula. Instead, they look at several factors:

• Training and experience — Your qualifications for the work you perform
• Duties and responsibilities — What you actually do in the business
• Time and effort — How many hours you devote to the business
• Comparable compensation — What similar businesses pay for similar roles
• Company revenue and profits — Larger, more profitable businesses generally need higher salaries
• Compensation history — What you've paid yourself in prior years
• Distribution history — Large distributions with tiny salaries raise red flags

Reasonable Salary Benchmarks

While there's no universal rule, these ranges are commonly used as starting points:

A common guideline: salary should represent roughly 50-70% of net profit for most service-based businesses. Businesses with significant capital investment or employees doing most of the work may justify a lower percentage.

IRS enforcement: The IRS has won multiple court cases against S Corp owners who paid unreasonably low salaries. In Watson v. Commissioner (2012), the Tax Court ruled that an accountant earning $200,000+ in S Corp distributions while paying himself zero salary owed back payroll taxes plus penalties.

For help determining your reasonable salary, try our S-Corp Salary Calculator.

Legal citation: IRS Revenue Ruling 74-44 and IRC §3121(a) govern reasonable compensation requirements.

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S Corp Costs and Compliance

The S Corp election isn't free. Before you elect, understand the ongoing costs:

Mandatory Costs

Total added cost: $1,500-$4,000/year above what you'd pay as a default LLC.

Compliance Requirements

Once you elect S Corp status, you must:

1. Run W-2 payroll — Pay yourself at least monthly or per your state's requirements
2. File Form 1120-S — Corporate information return, due March 15 (or September 15 with extension)
3. Issue Schedule K-1 — Report each shareholder's share of income
4. File quarterly payroll returns — Form 941 every quarter
5. Pay employer payroll taxes — Employer's share of FICA (7.65%)
6. Maintain corporate formalities — Meeting minutes, operating agreement, separate accounts

State-Specific Considerations

Some states add complications:

• California: $800 minimum franchise tax + 1.5% S Corp tax on net income
• New York: Fixed dollar minimum tax based on gross receipts ($25-$4,500)
• Texas: No state income tax, but franchise tax may apply
• Illinois: 1.5% replacement tax on S Corp income

Check our LLC Annual Tax and Fee Calculator for state-specific costs.

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How to Elect S Corp Status

Step 1: Form Your LLC First

If you haven't already, file articles of organization with your state. You need a legal entity before you can make a tax election.

Step 2: Get an EIN

Apply for an Employer Identification Number from the IRS at irs.gov/ein. It's free and takes about 5 minutes online.

For a complete guide to EINs and LLC formation, see our EIN and LLC startup guide.

Step 3: File Form 2553

Form 2553 is the S Corp election form. File it with the IRS by:

• For existing businesses: No more than 2 months and 15 days after the beginning of the tax year you want the election to take effect
• For new businesses: Within 2 months and 15 days of formation
• For 2026 tax year: The deadline is March 16, 2026 (for calendar-year filers)

Late election relief: If you miss the deadline, the IRS may grant late election relief under Revenue Procedure 2013-30 if you can show reasonable cause. File Form 2553 with a statement explaining why you're late.

Step 4: Set Up Payroll

Before the election takes effect, set up a payroll system. You'll need:

• Payroll provider (Gusto, ADP, Paychex)
• State employer accounts (unemployment insurance, workers' comp)
• Federal payroll tax deposit schedule

Step 5: Start Paying Yourself

Begin processing W-2 payroll at your determined reasonable salary. Most S Corp owners pay themselves monthly or semi-monthly.

Legal citation: IRC §1362(b) governs the timing and requirements for S Corp elections.

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S Corp vs LLC: Side-by-Side Decision Framework

Choose Default LLC When:

• Net profit is under $50,000 — Tax savings won't cover S Corp compliance costs
• Income is inconsistent — Hard to set a reasonable salary when revenue fluctuates month to month
• You're in your first year — Focus on building the business before adding tax complexity
• You prefer simplicity — No payroll, no corporate return, just Schedule C
• You're a California LLC earning under $80,000 — The 1.5% S Corp tax plus $800 franchise tax erodes savings

Choose S Corp Election When:

• Net profit consistently exceeds $60,000 — Savings meaningfully exceed added costs
• Income is relatively predictable — You can set a reasonable salary with confidence
• You have a CPA — Someone who can file Form 1120-S and advise on salary levels
• You're willing to run payroll — Monthly payroll processing is non-negotiable
• You plan to grow — The savings percentage increases as profit grows

The Breakeven Calculation

To find your breakeven point:

Added S Corp costs (payroll + tax prep): ~$2,000-$3,000/year

Self-employment tax savings formula:
(Net Profit - Reasonable Salary) × 15.3% = FICA savings

Breakeven when:
FICA savings > Added costs

Example:
At $70,000 profit with $45,000 salary:
($70,000 - $45,000) × 15.3% = $3,825 savings
Minus $2,500 in added costs = $1,325 net savings ✅

At $45,000 profit with $35,000 salary:
($45,000 - $35,000) × 15.3% = $1,530 savings
Minus $2,500 in added costs = -$970 net loss ❌

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QBI Deduction: Applies to Both

Both default LLCs and S Corps qualify for the Qualified Business Income (QBI) deduction — a 20% deduction on qualified business income under IRC §199A.

Key difference for S Corps: The QBI deduction applies to your pass-through income (distributions), NOT your W-2 salary. Since your salary is W-2 income, it doesn't qualify for the QBI deduction. This means the S Corp election can slightly reduce your QBI deduction amount.

Example at $100,000 net profit:

Default LLC:
  QBI deduction: $100,000 × 20% = $20,000

S Corp (salary $60,000, distributions $40,000):
  QBI deduction: $40,000 × 20% = $8,000
  (Salary is W-2 income, not QBI)

This QBI reduction partially offsets the self-employment tax savings. Your CPA should model both scenarios to find the optimal salary-to-distribution ratio.

Legal citation: IRC §199A governs the QBI deduction. IRC §199A(c)(4) excludes reasonable compensation from QBI.

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Common Mistakes to Avoid

Mistake #1: Electing S Corp Too Early

Problem: A new business owner earning $40,000 reads about S Corp tax savings and immediately files Form 2553. They spend $2,500 on payroll and tax prep, saving only $1,200 in self-employment tax.

Impact: Net loss of $1,300, plus the headache of running payroll and filing a corporate return.

Solution: Wait until your net profit consistently exceeds $60,000 before electing. The keyword is "consistently" — one good month doesn't justify the ongoing compliance burden.

Mistake #2: Setting an Unreasonably Low Salary

Problem: An S Corp owner earning $150,000 pays themselves a $30,000 salary and takes $120,000 in distributions to maximize tax savings.

Impact: IRS reclassification of distributions as wages, plus back taxes, interest, and penalties. The IRS specifically targets this pattern.

Solution: Research comparable compensation using BLS wage data, industry surveys, and your CPA's guidance. Document your methodology. A salary of 50-70% of net profit is a defensible starting point for service businesses.

Mistake #3: Forgetting to Run Payroll

Problem: An S Corp owner takes owner draws instead of processing formal W-2 payroll, or skips payroll during slow months.

Impact: The IRS can reclassify all distributions as wages, eliminating any tax savings and adding penalties.

Solution: Set up automated payroll from day one of your S Corp election. Pay yourself consistently, even if it means adjusting the salary amount during the year.

Mistake #4: Ignoring State Tax Implications

Problem: Electing S Corp status without checking state-level taxes. California, for example, charges a 1.5% tax on S Corp net income in addition to the $800 minimum franchise tax.

Impact: State taxes can significantly reduce — or even eliminate — the federal tax savings.

Solution: Model the full tax picture including state taxes before electing. Some states are S Corp-friendly (Texas, Florida, Wyoming), while others add meaningful cost (California, New York, Illinois).

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Track Your S Corp Finances With AI

Whether you're running a default LLC or have elected S Corp status, clean financial records are essential. For S Corp owners specifically, separating salary from distributions and tracking business expenses accurately determines both your tax liability and your audit risk.

What makes Jupid different:

✅ Automatic transaction categorization — Our AI categorizes your business expenses with 95.9% accuracy, matching them to the correct tax categories whether you file Schedule C or Form 1120-S

✅ Real-time financial insights — Ask your AI accountant questions like "What's my net profit this quarter?" and get instant answers via WhatsApp or iMessage

✅ Tax structure monitoring — Jupid tracks your income and alerts you when changing your tax election could save money

✅ Bank connection and auto-sync — Connect your business accounts and Jupid automatically separates business and personal transactions

Example conversation:

• You: "Based on my profit this year, would an S Corp election save me money?"
• Jupid: "Your net profit through September is $94,000. With a $58,000 reasonable salary, an S Corp election could save you approximately $5,500 in self-employment tax. After accounting for payroll costs, your net savings would be around $3,200."

Learn more about how Jupid keeps your business finances organized

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Action Checklist: Evaluating the S Corp Election

Before You Decide

• Calculate your net profit for the last 12 months
• Estimate your net profit for the current year
• Research reasonable salary for your role and industry
• Use our Self-Employment Tax Calculator to see current SE tax liability
• Get quotes for payroll services ($500-$1,500/year)
• Get a quote for Form 1120-S preparation ($800-$2,000)
• Check your state's S Corp tax treatment

If You Decide to Elect

• Confirm your LLC is properly formed with the state
• Obtain an EIN if you don't have one
• File Form 2553 before the deadline (March 16, 2026 for calendar year)
• Set up a payroll provider
• Determine your reasonable salary with CPA guidance
• Open a separate business bank account if you haven't already
• Begin processing W-2 payroll

Ongoing Compliance

• Process payroll at least monthly
• File quarterly payroll returns (Form 941)
• File Form 1120-S by March 15 (or request extension to September 15)
• Issue K-1 to all shareholders
• Review reasonable salary annually as profit changes
• Keep business and personal finances strictly separate
• Read our guide on staying tax compliant as an LLC

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Resources and Citations

IRS Publications (Official Sources)

• IRS Publication 542 — Corporations (covers S Corp taxation)
• IRS Publication 334 — Tax Guide for Small Business
• Form 2553 — Election by a Small Business Corporation
• Form 1120-S — U.S. Income Tax Return for an S Corporation
• Schedule K-1 (Form 1120-S) — Shareholder's Share of Income
• IRS: S Corporations — S Corp overview and requirements

Tax Code and Regulations

• IRC §1361 — S Corporation defined; eligibility requirements
• IRC §1362 — Election and termination of S Corp status
• IRC §1363 — Effect of S Corp election on corporation
• IRC §199A — Qualified Business Income deduction
• IRC §3121(a) — Definition of wages for FICA purposes
• Revenue Procedure 2013-30 — Late S Corp election relief

2026 Key Numbers

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Final Thoughts

The S Corp vs LLC decision is really about timing and math. An LLC gives you liability protection with minimal complexity. The S Corp election adds a tax optimization layer on top — but only when profit is high enough to justify the cost.

The key strategies:

1. Start with a default LLC — Get the liability protection without the compliance burden
2. Elect S Corp when the numbers work — Once net profit consistently exceeds $60,000 and you've accounted for payroll and tax prep costs
3. Set a defensible salary — The IRS watches for unreasonably low salaries, so document your reasoning and stay in the 50-70% range for service businesses

The S Corp election is reversible (you can revoke it), and you can make the election at any point. There's no rush — getting it right matters more than getting it early.

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Disclaimer

This article provides general information about S Corporation elections and LLC taxation and should not be considered legal or tax advice. Tax savings from S Corp elections vary significantly based on income level, state of residence, industry, and individual circumstances. The "reasonable salary" determination is fact-specific and should be made with guidance from a qualified tax professional. For advice specific to your situation, consult with a CPA or tax attorney.

Tax Year: 2026 Last Updated: February 3, 2026