S Corp vs LLC 2026
Most solo founders form an LLC — but the way it is taxed can be worth thousands. Electing S Corp status lets you split income into salary and distributions, cutting the 15.3% self-employment tax on part of it. Here is the 2026 math and when it is worth the effort.
Self-employment tax
15.3%
On sole-prop / LLC income
S Corp salary
FICA only
Distributions skip SE tax
Savings trigger
~$60k+
Net income where it pays
Election form
Form 2553
To choose S Corp status
LLC vs S Corp: The Basics
An LLC is a legal structure; an S Corp is a tax election. By default, a single-member LLC is taxed as a sole proprietorship — every dollar of profit flows to your personal return and is subject to self-employment tax. Electing S Corp status changes that: you become an employee of your own company, taking a reasonable salary and receiving remaining profit as distributions.
See your self-employment income picture
Understand your federal tax situation.
The Self-Employment Tax Difference
- Sole prop / LLC: all net profit is subject to the 15.3% self-employment tax (12.4% Social Security + 2.9% Medicare), up to the Social Security wage base.
- S Corp: only your salary is subject to FICA (the same 15.3% split between you and the company). Distributions above salary escape self-employment tax entirely.
The catch: the IRS requires the salary to be reasonable for the work you do. You cannot take a $10,000 salary on $200,000 of profit and call the rest distributions.
The Dollar Difference
Take a consultant with $120,000 of net income. As a sole proprietor, roughly $16,600 goes to self-employment tax. As an S Corp paying a reasonable $70,000 salary and taking $50,000 in distributions, the $50,000 distribution avoids about $7,650 of self-employment tax (15.3%) — minus the extra payroll costs. That recurring saving is the whole appeal of the S Corp election.
When S Corp Election Pays
The S Corp makes sense once your net income is comfortably above your reasonable salary — typically around $60,000 to $80,000 of profit. Below that, the payroll fees, separate return (Form 1120-S), and added bookkeeping usually outweigh the savings. High-income service businesses with low overhead get the biggest benefit.
The Extra Costs and Rules
- Payroll — you must run payroll and pay yourself a W-2 salary.
- Separate tax return — Form 1120-S annually (more prep cost).
- Reasonable salary — the IRS scrutinizes low salaries; underpaying invites audit risk.
- State franchise taxes — some states charge S Corps an annual fee or tax.
Frequently Asked Questions
Do I pay income tax on S Corp distributions?
Yes, distributions are still subject to ordinary income tax. The S Corp saves only the self-employment (FICA) tax on distributions, not the income tax itself.
What is a "reasonable salary"?
What you would pay someone else to do your job — factoring in your role, hours, experience, and industry pay. The IRS expects a defensible salary, not a token amount.
Can I form an LLC first and elect S Corp later?
Yes — a common path. Form the LLC, then file Form 2553 to elect S Corp taxation. There are timing deadlines, so coordinate with a CPA before the year you want it to take effect.
Is an S Corp better for everyone?
No. Low-profit businesses often see no benefit and only extra cost. The election pays when profit comfortably exceeds a reasonable salary — run the numbers before committing.
Sources
- IRS — S Corporation election (Form 2553) and reasonable compensation guidance.
- IRS — self-employment tax (SECA) at 15.3%.
- IRS Revenue Procedure 2025-32 — brackets used in examples.
This is informational, not legal or tax advice. The LLC-vs-S Corp decision depends on your income and state — consult a CPA before electing.