S-corp vs LLC: what is the tax difference?

LLC and S-corporation status are not competing versions of the same thing. An LLC is formed under state law. S-corporation status is a federal tax classification elected with Form 2553 by an eligible entity. An LLC can remain an LLC under state law while the IRS taxes it as an S-corporation.

The tax difference

A default single-member LLC generally reports business activity on Schedule C. A sole proprietor generally calculates self-employment tax on 92.35 percent of net earnings. The Social Security portion is subject to an annual wage base, Medicare has no wage cap, and Additional Medicare Tax can apply above fixed statutory thresholds.

An LLC taxed as an S-corporation files Form 1120-S. A shareholder who works for the corporation generally receives reasonable W-2 compensation before non-wage distributions. Qualified pass-through income may avoid employment tax, but it remains subject to income tax and Section 199A. The IRS reasonable-compensation standard turns on the work performed, time, experience, comparable pay, and the source of company receipts, not a preferred salary percentage.

2026 side-by-side illustration at $120,000

This screening example assumes a single filer in Texas, no other wages, an other-service-business industry setting, active participation, no non-owner W-2 wages, no qualified-property basis, and $1,500 of annual payroll and Form 1120-S administration cost.

• Modeled sole-proprietor self-employment and Additional Medicare tax: $16,956.
• Screening S-corporation salary: $42,000.
• Modeled S-corporation FICA and Additional Medicare tax: $6,426.
• Remaining modeled profit before other corporate adjustments: $78,000.
• Estimated total annual difference after administration cost: $6,963 in favor of the S-corporation under these assumptions.

The salary is a screening assumption, not an IRS-approved conclusion. A different salary, state, filing status, spouse income, employee payroll, qualified property, retirement plan, health-insurance deduction, FUTA, or SUTA can change the amount and can reverse which structure appears better.

What changes after the election?

• The entity files Form 1120-S and issues Schedule K-1 to its shareholders.
• A shareholder-employee needs compliant payroll and reasonable W-2 compensation.
• Federal and state payroll filings, unemployment taxes, and annual return costs may apply.
• Some states impose entity-level taxes or require separate S-corporation treatment.
• Section 199A remains an owner-level calculation and may differ because wages and pass-through income change.

The practical question is whether an existing or proposed entity should elect S-corporation taxation. There is no universal profit cutoff. Use a side-by-side model, document reasonable compensation, and confirm the result before filing Form 2553.