An LLC and an S-corp aren’t really alternatives: an LLC is how your business is set up under state law, and an S-corp is a federal tax election that an LLC can make. The real question is whether your LLC should elect it. That usually starts to pay off once your business makes roughly $50,000 or more a year in profit. Below that, the costs tend to eat the savings.
LLC vs S-corp: what’s the difference?
| LLC (default tax treatment) | LLC taxed as an S-corp | |
|---|---|---|
| What it is | A legal entity formed under state law | A federal tax election (Form 2553) an eligible LLC or corporation makes |
| How the owner is paid | Draws from profit | A reasonable salary through payroll, plus distributions |
| Self-employment or payroll tax | 15.3% on 92.35% of all profit (Social Security part capped at the wage base) | Payroll tax on the salary only; distributions skip it |
| Federal return | Schedule C on your 1040 (single owner) or Form 1065 (multiple owners) | Form 1120-S, plus a K-1 to each owner |
| Extra running costs | Low | Payroll, quarterly payroll returns, a separate business return |
| Who can elect | Any LLC | Up to 100 shareholders, one class of stock, US citizen or resident owners |
| Usually worth it when | Profit is under roughly $50,000 or uneven | Profit is steady and above roughly $50,000 |
The rest of this guide shows the math, what an S-corp costs to run, and how to time the election.
How does an S-corp save tax?
As a sole proprietor or single-member LLC, all of your net profit is subject to self-employment tax: 15.3% (12.4% Social Security up to the wage base, which is $184,500 for 2026, plus 2.9% Medicare with no cap). It applies to 92.35% of your profit, on top of income tax.
When your LLC elects S-corp tax treatment, your profit splits in two:
- Salary. You pay yourself a reasonable wage through payroll. Payroll taxes (the same 15.3%, split between you and the company) apply to this part.
- Distributions. The remaining profit passes to you as a distribution. It is still subject to income tax, but not to Social Security or Medicare tax.
The savings come from the profit you take as distributions instead of salary.
A worked example
A single-owner business with $100,000 of net profit, paying the owner a $50,000 salary:
| Sole proprietor / LLC | S-corp | |
|---|---|---|
| Self-employment or payroll tax | $14,130 (15.3% of $92,350) | $7,650 (15.3% of $50,000 salary) |
| Extra payroll and compliance costs | none | about $1,500 |
| Estimated yearly savings | about $5,000 |
This is an estimate before income-tax effects (the deduction for half of self-employment tax, the employer payroll tax deduction, the qualified business income deduction) and before state taxes. Those can push the real number up or down. Try your own numbers in the S-corp tax savings calculator.
What does an S-corp cost to run?
- Payroll. You must pay yourself wages, withhold taxes and file quarterly payroll returns (Form 941) plus annual W-2s.
- A separate business tax return. S-corps file Form 1120-S by March 15 each year and issue you a Schedule K-1.
- Cleaner books. You need monthly bookkeeping that separates salary, distributions and owner expenses.
- State costs. Some states charge S-corps an entity-level tax or fee, and a few don’t recognize the federal election at all.
What counts as a reasonable salary?
The IRS expects S-corp owners who work in the business to pay themselves what the work is worth: roughly what you’d pay someone else for the same role, hours and experience. There’s no safe-harbor percentage. Paying yourself too little to save tax is a well-known audit target, and the IRS can reclassify distributions as wages, with penalties and interest.
When is the deadline to elect?
File IRS Form 2553 no later than 2 months and 15 days after the start of the tax year you want the election to apply to.
- For tax year 2027 (calendar year): March 15, 2027.
- For a new business: 2 months and 15 days from the date it starts doing business.
- Missed it? The IRS has relief procedures for late elections when you have reasonable cause, often available for up to 3 years and 75 days after the intended effective date.
An LLC that files Form 2553 is treated as electing corporate tax status too, so you don’t need to form a new company.
When an S-corp is probably not worth it
- Your profit is under about $50,000, or swings a lot year to year
- You plan to close or sell the business soon
- You’re already above the Social Security wage base through a W-2 job (the savings shrink to the Medicare portion)
- Your state taxes S-corps heavily or doesn’t recognize the election
How we help
On our Bookkeeping & Tax plan, a CPA-backed tax team reviews whether an S-corp election makes sense for you, sets a defensible salary, files your 1120-S and your personal return, and plans your taxes year-round. Payroll is a separate add-on, priced on your call. Put your own profit into the S-corp tax savings calculator for a first estimate, then book a free 15-minute call and we’ll tell you whether electing for 2027 is worth it. The election is generally due by March 15, 2027 for a calendar-year business, and an S-corp needs payroll running before your first salary, so deciding early keeps the year simple.