LLC vs S-Corp vs C-Corp Tax Comparison 2026: Complete Breakdown

Choosing between LLC, S-Corp, and C-Corp taxation can save or cost you tens of thousands annually. This guide provides a complete tax comparison with real calculations so you can see exactly what each entity type means for your bottom line in 2026.

Quick Tax Comparison Table

Feature LLC (Default) S-Corp C-Corp
Income tax Personal rates (10-37%) Personal rates (10-37%) Flat 21%
Self-employment tax 15.3% on all profit 15.3% on salary only None (FICA on wages)
QBI deduction Yes (up to 20%) Yes (on profit, not salary) No
Double taxation No No Yes (dividends taxed)
Loss deduction Pass-through to personal Pass-through to personal Carried forward/back
Fringe benefits Limited Limited Full deduction
State taxes Varies by state Varies + some extra fees State corporate tax

LLC Taxation Explained

By default, single-member LLCs are taxed as sole proprietorships and multi-member LLCs as partnerships. This means:

Tax Structure

LLC Tax Example

Scenario: $150,000 profit, single filer, no other income Calculation:
  • Self-employment tax: $150,000 × 92.35% × 15.3% = $21,193
  • Deductible SE tax (50%): $10,597
  • Taxable income: $150,000 - $10,597 = $139,403
  • QBI deduction (20%): $27,881
  • Final taxable: $111,522
  • Income tax (2026 brackets): ~$18,900
Total tax: $40,093 (26.7% effective rate)

When LLC Taxation Makes Sense

S-Corp Taxation Explained

S-Corp election changes how you're taxed by splitting income into salary and distributions:

Tax Structure

S-Corp Tax Example

Scenario: $150,000 profit, $80,000 salary, $70,000 distribution Calculation:
  • Payroll taxes (employer + employee): $80,000 × 15.3% = $12,240
  • Employer portion deductible: $6,120
  • Salary income tax: ~$9,300
  • Distribution income tax: $70,000 - QBI deduction $14,000 = $56,000 taxable → ~$7,800
Total tax: $29,340 (19.6% effective rate) Savings vs LLC: $10,753

Reasonable Salary Guidelines

The IRS requires S-Corp owners to pay themselves a "reasonable salary" before taking distributions. Factors include:

Warning: Setting an unreasonably low salary to avoid payroll taxes is a major audit red flag. The IRS aggressively pursues S-Corp owners who underpay themselves.

S-Corp Cost Considerations

C-Corp Taxation Explained

C-Corps are separate tax entities with their own tax structure:

Tax Structure

C-Corp Tax Example

Scenario: $150,000 profit, take $100,000 as salary, $50,000 as dividend Calculation:
  • Corporate tax: $0 (profit after salary = $50,000, but let's say all reinvested)
  • Actually, let's use better example — $150K profit after salary:
  • Corporate tax: $150,000 × 21% = $31,500
  • Dividend tax (15% rate): $150,000 × 15% = $22,500
Total tax: $54,000 (36% effective rate — double taxation!)

When C-Corp Makes Sense

Side-by-Side Tax Calculations

Here's how each entity type handles the same profit level:

$100,000 Profit

Entity SE/Payroll Tax Income Tax Total Tax Effective Rate
LLC (default) $14,130 $10,700 $24,830 24.8%
S-Corp ($50K salary) $7,650 $11,200 $18,850 18.9%
C-Corp (no dividend) $0 $21,000 $21,000 21%
C-Corp (all dividend) $0 $36,000 $36,000 36%

$250,000 Profit

Entity SE/Payroll Tax Income Tax Total Tax Effective Rate
LLC (default) $29,715 $42,400 $72,115 28.8%
S-Corp ($100K salary) $15,300 $45,800 $61,100 24.4%
C-Corp (no dividend) $0 $52,500 $52,500 21%
C-Corp (all dividend) $0 $86,250 $86,250 34.5%

$500,000 Profit

Entity SE/Payroll Tax Income Tax Total Tax Effective Rate
LLC (default) $38,250* $115,000 $153,250 30.7%
S-Corp ($150K salary) $22,950 $106,000 $128,950 25.8%
C-Corp (no dividend) $0 $105,000 $105,000 21%
C-Corp (all dividend) $0 $180,000 $180,000 36%

*Social Security capped at wage base ($168,600 in 2024), so SE tax stops growing after ~$183K

Self-Employment Tax Breakdown

Understanding SE tax is crucial for entity selection:

The 15.3% Breakdown

Component Rate Wage Base Limit Notes
Social Security (employee) 6.2% $168,600 Stops growing after limit
Social Security (employer) 6.2% $168,600 Stops growing after limit
Medicare (employee) 1.45% None Unlimited
Medicare (employer) 1.45% None Unlimited
Total 15.3% — —

Additional Medicare Tax

High earners pay an extra 0.9% Medicare surtax:

S-Corp SE Tax Strategy

With S-Corp, you only pay SE/payroll tax on your salary, not distributions:

Example: $200,000 profit
  • LLC: SE tax on $200,000 = ~$26,000 (after wage base cap)
  • S-Corp ($80K salary): Payroll tax on $80,000 = ~$12,240
  • Savings: $13,760
At higher profits, S-Corp savings exceed $20,000+ annually.

QBI Deduction Impact

The Qualified Business Income deduction allows pass-through entities (LLC, S-Corp) to deduct up to 20% of qualified income:

QBI Rules

Entity Impact

Entity QBI on Salary QBI on Distributions Notes
LLC N/A (no salary) Yes 20% deduction on all profit
S-Corp No Yes 20% deduction on distributions only
C-Corp No No Not available

Understanding Double Taxation

C-Corps face potential double taxation, but it's not always a disadvantage:

How Double Taxation Works

  1. Corporate level: 21% tax on profits
  2. Individual level: 15-20% tax on qualified dividends
  3. Combined rate: 36% on distributed profits (21% + 15% of remaining 79%)

When Double Taxation Doesn't Matter

Strategies to Minimize

Decision Framework

Choose LLC (Default) When:

Choose S-Corp When:

Choose C-Corp When:

Frequently Asked Questions

Can I switch from LLC to S-Corp taxation?

Yes. File Form 2553 by March 15 to elect S-Corp treatment for the current tax year. You can also file late with reasonable cause. The underlying LLC structure remains — only tax treatment changes.

What's the profit threshold for S-Corp to make sense?

Generally $60,000-80,000 in annual profit. Below that, self-employment tax savings don't offset payroll costs ($500-1,200/year) and additional tax preparation fees. Use an S-Corp tax calculator for your specific situation.

Can C-Corps avoid double taxation?

Yes, by reinvesting profits (21% flat rate), paying salaries/bonuses to zero out profit, or selling stock instead of taking dividends. Many C-Corps never pay dividends, avoiding double taxation entirely.

How does state tax affect this comparison?

States vary significantly. California charges $800 minimum franchise tax for LLCs and S-Corps plus a 1.5% fee on S-Corp income. Some states don't recognize S-Corp status. Always factor state taxes into your decision.

Should I form an LLC or S-Corp for my side business?

For side businesses under $50,000 profit, stick with LLC (default) taxation. The simplicity and lower costs outweigh small SE tax savings. Consider S-Corp election once the business consistently exceeds $80,000 profit.

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Final Thoughts

The best entity type depends on your profit level, growth plans, and personal tax situation:

The tax differences can be substantial — often $10,000-25,000+ annually at higher profit levels. But tax savings shouldn't be the only factor. Consider your growth trajectory, exit plans, and administrative capacity before choosing.

Last updated: February 27, 2026