LLC vs S Corp Taxes: What Actually Changes
By the PWM Tax Group team ·
An LLC and an S corp are taxed differently because an LLC is a legal entity while an S corp is a tax election, and the core difference is how the owner's income is treated for self-employment tax. A single-member LLC is taxed by default as a sole proprietorship, meaning all net business profit flows to your personal return and is subject to self-employment tax. When an LLC elects S-corp status, the business pays you a reasonable salary that is subject to payroll taxes, and the remaining profit passes through as a distribution that is not subject to self-employment tax. Both are pass-through structures, so profit is generally taxed once at the owner level rather than at the corporate level. The S-corp election adds real obligations too: running payroll, filing a separate 1120-S return, and documenting that your salary is reasonable for the work you do. Whether the election fits depends on your profit level, the salary a role like yours commands, and the cost of the added compliance. Below we explain each piece so you can have an informed conversation about your own facts.
Is an LLC a tax structure or a legal structure?
An LLC is a legal structure, not a tax structure, and that distinction is the key to this whole topic. When you form an LLC with your state, the IRS does not have a matching "LLC" tax category, so it assigns you a default tax treatment based on the number of owners. A single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership. In both cases the LLC itself usually pays no federal income tax, and the profit passes through to the owners' personal returns. Because the LLC is flexible, it can also elect to be taxed as an S corporation or a C corporation by filing the right form with the IRS. This is why "LLC vs S corp" is slightly misleading: many S corps are LLCs that made an election.
How does the S-corp election change your taxes?
An S-corp election changes how much of your business profit is exposed to self-employment or payroll tax. As a default LLC, your entire net profit is generally subject to self-employment tax, which covers Social Security and Medicare. After an S-corp election, you split your income into two parts: a reasonable salary paid through payroll, which is subject to Social Security and Medicare taxes, and the remaining profit taken as a distribution, which is not. The income tax on your total profit does not disappear, because both salary and distributions still flow to your personal return. The potential difference lies in the payroll-tax treatment of the distribution portion. That is why the S-corp conversation almost always centers on the level of profit and the salary your role would reasonably require.
What is a reasonable salary for an S-corp owner?
A reasonable salary is the compensation an S-corp owner must pay themselves for the work they actually perform, and the IRS requires it before any distributions are taken. There is no fixed formula, but the salary should reflect what someone would be paid to do your job in your industry, region, and role. Factors include your duties, your experience, the time you devote to the business, and what comparable positions pay. Setting the salary too low to reduce payroll taxes is a known area of IRS scrutiny, and getting it wrong can create back taxes and penalties. Documenting how you arrived at the figure matters as much as the number itself. This is one of the main reasons the S-corp election needs planning rather than a quick online setup.
When might an S-corp election make sense?
An S-corp election tends to become worth analyzing once a business consistently earns more profit than the owner would reasonably take as salary. Below that point, the added costs of running payroll, filing a separate 1120-S return, and maintaining stricter records can outweigh any payroll-tax difference. Above it, the distribution portion of profit may be treated differently for payroll-tax purposes, which is what draws owners to the election. The right answer depends on your specific numbers, including your profit, a defensible reasonable salary, your state's rules, and your retirement and benefits plans. Because these variables interact, we look at multi-year projections rather than a single year in isolation. The goal is a structure that fits your whole situation, not just this filing season.
What extra compliance does an S corp require?
An S corp carries more administrative work than a default LLC, and that cost is part of the comparison. You must run formal payroll for yourself, which means withholding, payroll tax deposits, and payroll filings throughout the year. The business files its own tax return on Form 1120-S and issues you a Schedule K-1 for your share of income. You also need to keep clean books that separate salary from distributions and support the reasonableness of your compensation. Missing payroll deadlines or blurring the line between salary and distributions can create problems that erase the reason for electing in the first place. For many owners the value of the election depends on having this compliance handled reliably and connected to the broader tax plan.
Disclaimer
This page is general information, not tax advice for your situation. Tax outcomes depend on your own facts; please speak to us before acting on anything here.
Questions people ask.
Is an S corp always better than an LLC for taxes?
No, an S corp is not always better than an LLC for taxes, because the value of the election depends on your profit level and the reasonable salary your role requires. The S-corp structure adds payroll, a separate return, and stricter recordkeeping, and those costs can outweigh any payroll-tax difference when profit is modest. The right structure comes from analyzing your own numbers rather than applying a rule of thumb.
Can an LLC be taxed as an S corp?
Yes, an LLC can be taxed as an S corp by filing the S-corp election with the IRS, typically Form 2553, while remaining an LLC at the state level. This is very common: many businesses that operate as S corps for tax purposes are legally LLCs. The election changes your federal tax treatment, not your legal entity type.
Do both LLCs and S corps avoid double taxation?
Yes, both LLCs and S corps are generally pass-through entities, so business profit is usually taxed once at the owner level rather than at both the corporate and individual levels. This differs from a C corporation, where profit can be taxed at the corporate level and again when distributed as dividends. The main tax difference between an LLC and an S corp is how the owner's income is treated for self-employment and payroll taxes.
What taxes do I still pay after electing S-corp status?
After electing S-corp status you still pay income tax on your total business profit, plus Social Security and Medicare taxes on your salary through payroll. The distribution portion of profit is generally not subject to self-employment tax, but it is still subject to income tax on your personal return. You also take on payroll filings and a separate business tax return, so the election shifts and adds obligations rather than removing them.
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