S-Corp vs C-Corp Tax Comparison: Complete Guide
The difference between S-Corp and C-Corp taxation can mean tens of thousands of dollars in your pocket—or double taxation that eats your profits. This guide breaks down the numbers so you can choose wisely.
The Fundamental Difference
C-Corp: Separate taxable entity. The corporation pays taxes on profits. When it distributes dividends to shareholders, they pay taxes again. This is "double taxation."
S-Corp: Pass-through entity. The corporation pays no federal income tax. All profits pass through to shareholders' personal returns. Single layer of taxation.
Tax Rate Comparison
C-Corp Taxation
- Corporate tax rate: Flat 21% (federal)
- Dividends taxed at shareholder level: 0-20% (qualified dividends)
- Effective total tax on distributed profits: 21% + up to 20% = up to 41%
S-Corp Taxation
- Corporate level: $0 federal income tax
- Shareholder level: Ordinary income rates (10-37%)
- Self-employment tax avoidance on distributions (big savings)
- Qualified Business Income deduction: Up to 20% deduction (Section 199A)
Real Numbers: Example Scenarios
Scenario 1: $100,000 Profit, Single Shareholder
C-Corp:
- Corporate tax (21%): $21,000
- Remaining for distribution: $79,000
- Dividend tax (15% typical): $11,850
- Net to shareholder: $67,150
- Effective tax rate: 32.85%
S-Corp:
- Corporate tax: $0
- Pass-through to shareholder: $100,000
- Personal income tax (22% bracket, married): $12,958
- QBI deduction (20%): Saves $4,400
- Net after tax: $83,442
- Effective tax rate: 16.56%
Winner: S-Corp saves ~$16,000 on $100K profit
Scenario 2: $500,000 Profit, Single Shareholder
C-Corp:
- Corporate tax (21%): $105,000
- Remaining: $395,000
- Dividend tax (20% high earner): $79,000
- Net to shareholder: $316,000
- Effective tax rate: 36.8%
S-Corp:
- Corporate tax: $0
- Pass-through: $500,000
- Personal income tax (35% bracket): $130,598
- QBI deduction (limited at high income): ~$20,000 savings
- Net after tax: $389,402
- Effective tax rate: 22.1%
Winner: S-Corp saves ~$73,000 on $500K profit
The Self-Employment Tax Advantage (S-Corp Only)
This is where S-Corps shine for small business owners.
LLC/Sole Proprietor: Pay 15.3% self-employment tax on ALL net income.
S-Corp: Pay 15.3% FICA only on "reasonable salary." Distributions are exempt.
Example: $150,000 Business Income
LLC:
- Self-employment tax: $150,000 × 15.3% = $22,950
- Plus income tax on full amount
S-Corp (with $80K reasonable salary):
- FICA on salary: $80,000 × 15.3% = $12,240
- FICA on $70K distribution: $0
- Savings: $10,710
S-Corp advantage: ~$10,700/year in self-employment tax savings
When C-Corp Makes Sense
Despite the tax disadvantage, C-Corps win in specific situations:
1. Reinvesting Profits for Growth
If you're not distributing profits, double taxation doesn't apply. C-Corps can reinvest at 21% tax rate instead of owner's personal rate (up to 37%).
2. Raising Venture Capital
VCs require C-Corp structure. They need preferred stock, which S-Corps cannot issue. If you're seeking institutional funding, C-Corp is mandatory.
3. Planning for IPO or Acquisition
Public companies are C-Corps. Acquirers often prefer C-Corp targets for cleaner deals. QSBS (Qualified Small Business Stock) benefits only apply to C-Corps.
4. Multiple Stock Classes Needed
S-Corps can only have one class of stock. If you need voting/non-voting shares or different dividend rights, C-Corp is required.
5. Foreign Shareholders
S-Corps cannot have non-US shareholders. International ownership requires C-Corp.
S-Corp Limitations
- Maximum 100 shareholders
- US citizens/residents only
- One class of stock only
- Cannot be owned by another corporation
- Reasonable salary requirement (IRS scrutiny)
The "Reasonable Salary" Trap
S-Corp owners must pay themselves a "reasonable salary" before taking distributions. The IRS cracks down on $0 salaries with large distributions.
What's reasonable?
- Industry standards for your role
- Time and effort invested
- Training and experience
- What you'd pay a non-owner to do the job
Safe approach: 40-60% of profits as salary, rest as distributions.
State Tax Considerations
Federal taxes aren't the whole story. Some states add their own complications:
- California: $800 minimum franchise tax for both, plus 1.5% tax on S-Corp net income
- New York City: Does not recognize S-Corp status (taxed as C-Corp locally)
- Texas: Franchise tax applies to both structures
Always check state-specific rules before deciding.
Conversion Possibilities
LLC to S-Corp: Easy election with IRS (Form 2553). No business restructuring needed.
S-Corp to C-Corp: Can revoke S-election, but there may be tax consequences. Built-in gains tax can apply for 5 years post-conversion.
C-Corp to S-Corp: Possible but complex. Built-in gains tax applies for 5 years. LIFO recapture may be triggered.
Decision Framework
Choose S-Corp if:
- You're a small business distributing most profits to owners
- You want to minimize self-employment tax
- You have fewer than 100 US shareholders
- You don't need complex stock structures
- You're not seeking VC funding
Choose C-Corp if:
- You're raising venture capital
- You're reinvesting profits for growth
- You plan to go public or be acquired
- You have foreign investors
- You need multiple stock classes
The Bottom Line
For most small businesses with profits under $1 million, S-Corp delivers significant tax savings—potentially $20,000-100,000+ annually depending on income level and salary optimization.
But tax savings aren't everything. Your business goals, funding plans, and growth trajectory matter. Choose based on where you're going, not just where you are today.
Need Help Choosing?
Entity selection has lasting consequences. Get it right the first time. Schedule a consultation to discuss your specific situation.