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S-Corp vs LLC

LLC is the entity. S-Corp is a tax election that any LLC can make. The election trades payroll-tax savings on profit distributions for ~$2k–$4k of annual overhead. The math turns positive somewhere around $40k–$60k of net profit and accelerates from there.

Side-by-side comparison

Feature LLC (default pass-through) LLC with S-Corp election
Federal tax form Schedule C (single-member) or Form 1065 (multi) Form 1120-S + Schedule K-1 to owner
SE/FICA tax base 100% of net profit Only W-2 reasonable comp portion
Owner pay mechanism Owner draws (no payroll) W-2 salary + distributions (split)
Payroll filings None Form 941 quarterly, Form 940, W-2/W-3 annual
Reasonable-comp scrutiny N/A High — IRS audit target
QBI deduction (§199A) 20% of net SE income (subject to phase-out) 20% of distribution portion only
Retirement-plan base Net SE earnings (after SE-tax adj.) W-2 wages only
Owner can be foreign / non-resident? Yes No — US persons only
Multiple share classes / VC investment? Yes No — one class of stock
Annual overhead estimate $300–$600 prep $2,000–$4,000 (payroll + prep + state min tax)
State franchise / minimum tax Varies (often lower) $800 (CA), $400+ (other states)

Worked example: net profit $75k / $150k / $300k

Assumes single-owner LLC with no other employees. Reasonable comp set at 40% of profit (illustrative — actual ranges 30–60% by industry). S-Corp overhead = $3,500/yr. SE-tax = 15.3% on the first $176,100 (2025 SS wage base) and 2.9% above (Medicare only):

Profit LLC SE tax S-Corp W-2 / Dist split S-Corp FICA on W-2 S-Corp net savings (after $3.5k overhead)
$75,000 $10,597 $30,000 / $45,000 $4,590 $2,507
$150,000 $21,194 $60,000 / $90,000 $9,180 $8,514
$300,000 $29,871 $120,000 / $180,000 $18,360 $8,011

Numbers are pre-QBI and pre-state. The S-Corp distribution can also reduce QBI base above SSTB thresholds, partially offsetting SE-tax savings for high-income service businesses. Run our SE tax calculator with your actual profit before electing.

Frequently asked questions

Is an S-Corp a different entity from an LLC?
S-corporation is a tax election (Form 2553), not an entity type. An LLC is a state-law entity that defaults to pass-through taxation as a sole proprietorship (1 owner) or partnership (2+ owners). The same LLC can elect to be taxed as an S-corp by filing Form 2553 — the legal entity stays an LLC but the IRS taxes it under Subchapter S.
What's the tax-savings argument for electing S-Corp?
A default LLC owner pays 15.3% self-employment tax on every dollar of profit (up to the SS wage base, then 2.9% Medicare above). An S-Corp owner pays 15.3% only on the W-2 "reasonable compensation" portion; the remaining profit flows through as distributions, which are not subject to SE/FICA tax. On $100k of profit, that can save $7,000–$10,000 a year in payroll tax.
What is reasonable compensation?
The IRS requires S-Corp owner-employees to take a salary that reflects the fair market value of services performed. There is no formula in the Code; case law uses comparable-position salaries, time spent, and industry data. The IRS audits S-Corps that pay implausibly low salaries (e.g., $15k W-2 on $300k profit) and reclassifies distributions as wages with payroll tax + penalties. Tools like RCReports and the Bureau of Labor Statistics OEWS database are commonly cited.
What does S-Corp status cost in additional overhead?
Annual costs typically include: payroll-processing service ($600–$1,500), Form 1120-S tax preparation ($800–$2,500 vs $300–$600 for Schedule C), state franchise/minimum tax ($800 in California, varies elsewhere), and bookkeeping for separate accountable plans. SE-tax savings need to clear ~$3,000–$5,000 of overhead before the election pays off — meaning roughly $40k–$60k of net profit is the rough break-even point.
How does the QBI deduction interact?
Both default LLC and S-Corp owners can claim the Section 199A QBI deduction (20% of qualified business income, subject to phase-outs). For an S-Corp, only the distribution portion counts toward QBI — W-2 wages paid to yourself are not qualified business income. Above the phase-in thresholds ($197,300 single / $394,600 MFJ for 2025, per Rev. Proc. 2024-40), the W-2 wage limitation starts to bind and — for SSTBs — the deduction starts phasing out entirely (fully gone at $247,300 single / $494,600 MFJ). Reducing W-2 wages in that range can reduce the QBI deduction, so the S-Corp election interacts with QBI in non-obvious ways for high earners.
Can an LLC owner contribute more to retirement accounts than an S-Corp owner?
The answer depends on plan design. A default LLC owner can contribute to a SEP IRA up to 20% of net SE earnings (after the SE-tax adjustment), or to a Solo 401(k) as both employee ($23,500 in 2025) and employer (20% of net SE earnings). An S-Corp owner can only base employer contributions on their W-2 wages, not distributions — so a low-salary S-Corp owner has lower retirement-plan capacity. See our SEP IRA vs Solo 401(k) calculator.
When does S-Corp NOT save money?
S-Corp election rarely pays for: (1) net profit under $40k–$50k (overhead exceeds savings); (2) businesses with high reasonable comp requirements (medical / legal / engineering — IRS expects $200k+ salaries); (3) owners who need maximum retirement contributions; (4) businesses with multiple non-resident owners (S-Corps cannot have foreign shareholders); (5) anyone planning to take VC investment (S-Corps cannot have entity owners or multiple share classes — see Form 2553 instructions).
How do I make the S-Corp election?
File Form 2553 (Election by a Small Business Corporation) within 2 months and 15 days of the start of the tax year (March 15 for calendar-year taxpayers) to elect S-Corp status for the current year. Late elections can sometimes be cured with reasonable cause under Rev. Proc. 2013-30. Once elected, you must run payroll, file Form 941 quarterly, issue yourself a W-2, and file Form 1120-S annually.

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