LLC vs S-Corp Tax Guide: Which Saves You More Money in 2026
The difference between LLC default taxation and S-Corp election can mean $10,000+ in annual tax savings. But the wrong choice costs you in complexity and compliance. Here's how to decide.
The Core Difference: Self-Employment Tax
Here's what makes S-Corps special:
- LLC (default): All profit is subject to 15.3% self-employment tax
- S-Corp: Only your salary is subject to payroll tax—distributions are tax-free for Social Security/Medicare
This one distinction drives the entire S-Corp vs LLC decision.
The Math: LLC Default Taxation
Let's say your business earns $150,000 in profit:
Every dollar of profit gets hit with self-employment tax. No escape.
The Math: S-Corp Election
Same $150,000 profit, but you pay yourself a reasonable salary of $80,000:
Savings: $10,710 per year.
When Does S-Corp Make Sense?
S-Corp election becomes worthwhile when:
- Profit exceeds $60,000-80,000: Below this, the savings don't justify the extra costs
- You can justify a reasonable salary: You need to document market-rate compensation
- You're not raising VC funding: S-Corps can't have more than 100 shareholders or foreign investors
- You can handle payroll: Either you run it or pay a service
Hidden Costs of S-Corp
Before you switch, factor in:
- Payroll service: $500-1,500/year
- Additional tax filings: Form 1120-S, state returns, K-1s
- CPA costs: Often $1,000-3,000 more per year
- State franchise taxes: Some states (like California) charge $800 minimum
- Your time: More administrative complexity
Total extra costs: typically $2,000-5,000/year. Your savings need to exceed this.
What Is "Reasonable Salary"?
The IRS doesn't give a specific number. They look at:
- What you would pay someone else to do your job
- Industry standards for your role and experience
- Your qualifications and time invested
- Business size and profitability
- Geographic location (cost of living)
Examples by profession:
- Software consultant: $100,000-$180,000
- Marketing consultant: $70,000-$120,000
- Real estate agent: $50,000-$100,000
- Designer: $60,000-$100,000
Document your research. Save salary surveys. Be prepared to defend your number.
How to Elect S-Corp Status
- Form an LLC: S-Corp is a tax election, not a business entity
- File Form 2553: Due within 2 months and 15 days of formation, or by March 15 for existing businesses
- Set up payroll: Before taking distributions, you need a salary
- Open a business bank account: Keep salary and distributions separate
- File quarterly payroll taxes: Don't fall behind
When to Stay as LLC Default
Keep default taxation if:
- Profit under $60,000: Savings don't justify complexity
- You want simplicity: One tax return, no payroll
- You're testing the business: Easy to switch later when profitable
- You need foreign investors: S-Corps can't have them
- You're raising VC: Most VCs require C-Corp anyway
2026 Tax Planning Tips
Regardless of your election:
- QBI deduction: LLCs and S-Corps both qualify for the 20% qualified business income deduction
- Retirement accounts: Solo 401(k) or SEP-IRA can shelter $60,000+ from taxes
- Health insurance: Self-employed health insurance premiums are deductible
- Track expenses: Document everything—both entity types benefit from deductions
Quick Decision Checklist
Go S-Corp if you check ALL these boxes:
- ☐ Profit consistently above $80,000/year
- ☐ You can document a reasonable salary
- ☐ You don't need foreign or institutional investors
- ☐ You're willing to run payroll (or pay someone to)
- ☐ Savings exceed $3,000+ after extra costs
If you're missing any box, stay with LLC default taxation for now.
Final Verdict
For most solo entrepreneurs and small business owners:
- Under $80K profit: Stay LLC default
- $80K+ profit: Elect S-Corp
- $200K+ profit: Definitely S-Corp—savings are substantial
The right entity structure saves you money. The wrong one wastes your time. Run the numbers, be honest about your salary, and decide based on math—not fear or fashion.