Here's the confusion that never dies: an LLC is a state-law business structure, while an S corporation is a federal tax election. They're not rivals — an LLC can choose to be taxed as an S corp, and that's the comparison most people actually mean. The stakes are real. Under 2026 rates, a business clearing $120,000 of profit saves roughly $7,800 a year in self-employment tax by making the election, and the saving grows from there. Below about $60,000 of profit, the election usually costs more than it saves.
An LLC is what you file with your state: articles of organization, a registered agent, an operating agreement. It gives you liability protection and, by default, pass-through taxation — the business itself pays nothing; you report profit on your personal return. Formation costs $35 to $500 depending on the state.
"S corp" describes how the IRS taxes you, not how your state recognizes you. File Form 2553 and the business splits your money into two pipes: a W-2 salary you pay yourself through payroll, and distributions of what's left over. The salary gets payroll taxes like any job. The distributions don't. That split is the entire game.
| LLC (default taxation) | LLC taxed as S corp | |
|---|---|---|
| State filing | Articles of organization, $35–$500 | Same — plus IRS Form 2553 |
| How you get paid | Owner draws, whenever | W-2 salary through payroll + distributions |
| Self-employment tax | 15.3% on 92.35% of all net profit | 15.3% on the salary only |
| Payroll required | No | Yes — quarterly filings even for one employee |
| Extra accounting | Minimal — Schedule C or partnership return | 1120-S return + reasonable-comp documentation |
| Typical added cost | $0 | ~$1,000–$1,500/yr (payroll service + tax prep) |
Both keep liability protection, both are pass-throughs for income tax, and both can claim the qualified business income deduction. The only thing you're buying with the S election is the payroll-tax split — plus paperwork.
A default LLC owner pays self-employment tax on nearly all profit: 15.3% (12.4% Social Security + 2.9% Medicare) applied to 92.35% of net earnings, since the IRS lets you deduct the employer half first. The Social Security piece applies up to the 2026 wage base of $184,500; Medicare has no cap. On $120,000 of profit that's 120,000 × 0.9235 × 15.3% ≈ $16,955.
Now the S corp version. Pay yourself a $60,000 salary and take the other $60,000 as distributions. Payroll tax hits the salary only: 60,000 × 15.3% = $9,180. The distributions skip it entirely — they're still income tax, but not payroll tax. The election saved $7,775 in one line of arithmetic.
That's the whole mechanism — not a loophole exactly, since the reasonable-compensation rule exists to keep it honest, but the one lever a profitable owner-operated business can still pull.
The savings scale with the distribution slice: whatever profit remains after a defensible salary escapes payroll tax. The payroll service and the extra tax return cost roughly $1,000 to $1,500 a year whether you save anything or not. Run the numbers at four profit levels, each with a salary assumption a CPA might defend for a full-time operator:
| Net profit | Assumed salary | SE tax (LLC default) | Payroll tax (S corp) | Tax saved | Saved after ~$1,200 costs |
|---|---|---|---|---|---|
| $60,000 | $35,000 | $8,478 | $5,355 | $3,123 | ~$1,900 |
| $80,000 | $45,000 | $11,304 | $6,885 | $4,419 | ~$3,200 |
| $120,000 | $60,000 | $16,955 | $9,180 | $7,775 | ~$6,600 |
| $200,000 | $90,000 | $28,234* | $13,770 | $14,464 | ~$13,300 |
*At $200,000 of profit the SE base ($184,700) just crosses the $184,500 Social Security wage base, so the last dollars only owe the 2.9% Medicare piece — the table applies the cap. Note what the first row says, though: at $60,000 of profit the election nets about $1,900, and a leaner year wipes it out entirely. That volatility is why the common advice is to wait until profit is reliably past the $60,000–$80,000 mark. An S election you flip in and out of looks indecisive to the IRS, so make it when the numbers are stable.
The IRS requires S corp owner-employees to pay themselves a salary comparable to what the market pays for the work they do. Pay yourself $12,000 for a full-time consulting business that nets $150,000 and you've drawn a target on the file — the agency can recharacterize distributions as wages, with back taxes, penalties, and interest attached.
What holds up: salary data for your role and metro, documented duties and hours, and a defensible split. What doesn't: a fixed percentage everyone quotes, paying dividends instead of salary because cash is tight, or a salary that swings with profit while distributions run the other way. Keep a compensation memo each year citing what similar positions pay.
Payroll is the big one. Even one employee means quarterly 941 filings, W-2s at year end, state unemployment registration, and deposits on a schedule. A basic payroll service runs roughly $500 to $1,000 a year for a single owner-employee; add the more complex 1120-S return and total overhead lands near $1,000–$1,500. State fees don't care about your federal election — California collects its $800 minimum franchise tax either way — and those numbers live in the LLC cost guide.
It changes the frame more than the decision. The qualified business income deduction — 20% of pass-through profit — was made permanent by 2025 legislation and rises to 23% for 2026 returns below the income threshold. Both structures qualify, so it rarely tips the choice. The wrinkle: S corp owners subtract their own W-2 wages from QBI, so a fatter salary trims the deduction while a thinner one grows it. Net of everything, the payroll-tax split still dominates for most owners; QBI is the second-order effect your CPA balances at salary-setting time.
Compare what your state charges to form and keep the entity before you worry about federal elections — then take-home math decides the rest.
LLC Cost Calculator →Default LLC until profit is boring and predictable. Elect S corp taxation when it is, set a salary you can defend with market data, and let the distributions do the saving — about $7,800 a year at $120,000 of profit under the 2026 wage base, more as you grow. Budget the $1,200 of overhead honestly and revisit the salary every year. The incorporation cost calculator prices the entity in any state, the self-employment tax calculator shows the default bill you're escaping, and the payroll calculator prices the salary side once the election is live.
They solve different problems, so the question is really whether the S tax election helps your numbers. A plain LLC is simpler and cheaper and wins for low or uneven profit. Once net profit consistently clears roughly $60,000 to $80,000, the self-employment tax saved by an S election usually outruns the payroll and accounting costs it adds. At $120,000 of profit with a $60,000 salary, the saving is about $7,800 a year before those costs.
Yes, and that is how most people do it. You form an LLC under state law, then file IRS Form 2553 to tax it as an S corporation. You keep the LLC's simpler state paperwork and get the S corp's split between salary and distributions. You do not have to form a corporation to get S corp taxation.
Below about $40,000 of net profit, the payroll costs and extra accounting almost always eat the tax savings — many CPAs put the practical floor at $60,000. The math turns clearly positive somewhere between $60,000 and $80,000 of profit, and improves as profit grows and the distributions left after a reasonable salary grow with it.
The IRS requires reasonable compensation: a salary comparable to what similar businesses pay for similar work, judged by your role, duties, and local market rates. Paying yourself $1 and taking the rest as distributions is the classic audit flag. There is no safe percentage — what counts is that the salary would survive comparison with salary data for your job in your area.
Yes. The qualified business income deduction applies to pass-through income either way, and legislation in 2025 made it permanent while raising the rate from 20% to 23% starting with 2026 returns for owners below the income threshold. One nuance: S corp owners subtract their own W-2 wages from qualified business income, so a bigger salary shrinks the QBI base while avoiding payroll tax on distributions works the other way.