The question comes up constantly among business owners, independent contractors, and professionals who have outgrown the simplicity of filing a Schedule C. You formed an LLC because it was the sensible first step. Now the business is producing real income, and someone, maybe a colleague, an accountant, or an article on the internet, has suggested that an S-corp election might reduce your tax bill. Before that conversation goes anywhere productive, you need to understand what the actual tax difference between an LLC and an S-corp is, because they are not as different as most people assume, and they are not as similar as many people think.
The short version: both structures use pass-through taxation. The significant difference is in how self-employment tax applies to the income before it passes through to you.
When you form an LLC and do nothing further with the IRS, the tax treatment is simple. For a single-member LLC, the IRS treats the business as a disregarded entity. All of the business income and expenses flow directly to Schedule C of your personal Form 1040. There is no separate business return. The profit on Schedule C is your self-employment income, and you pay self-employment tax on all of it.
For a multi-member LLC, the default treatment is partnership taxation. The LLC files Form 1065, issues a Schedule K-1 to each member, and each member reports their share of income on their personal return. All of that pass-through income is generally subject to self-employment tax as well.
For 2026, the self-employment tax rate is 15.3 percent. That breaks down as 12.4 percent for Social Security on earnings up to the wage base of $184,500, and 2.9 percent for Medicare with no cap. There is also a 0.9 percent Additional Medicare Tax that applies to individual earnings above $200,000.
On $150,000 of net LLC profit, the self-employment tax bill runs approximately $21,240 before any income tax is calculated. The LLC owner deducts half of that self-employment tax as an above-the-line deduction, which reduces adjusted gross income slightly, but the core obligation stands. Every dollar of net profit is subject to the full self-employment tax rate.
Tip: LLC owners can deduct half of the self-employment tax paid as an adjustment to income on their personal return. That deduction does not eliminate the tax, but it does reduce the taxable income on which income tax is calculated, which produces a modest offset.
When an LLC elects S-corp tax treatment by filing Form 2553, the entity begins filing a Form 1120-S each year instead of a Schedule C or Form 1065. Income still passes through to the owner's personal return, so the S-corp does not pay federal income tax at the entity level, that part is the same.
What changes is the structure of how the owner receives income from the business. The owner is now required to pay themselves a W-2 salary that the IRS considers reasonable compensation for the work they perform. That salary is subject to payroll taxes: the employee side of 7.65 percent and the employer side of 7.65 percent, for a combined 15.3 percent on the salary amount. The employer half of those payroll taxes is deductible as a business expense for the S-corp, which reduces the taxable income that flows through to the owner's personal return.
The remaining profit after the salary is taken distributes to the owner as a shareholder distribution. That distribution is reported on a Schedule K-1 and flows to the personal return as income subject to income tax. It is not subject to self-employment tax or payroll taxes. That is the source of the savings.
Tip: The employer half of payroll taxes paid on the owner's salary is a deductible business expense for the S-corp. That deduction reduces the ordinary income that flows to the owner's K-1, which means the income tax bill on the distribution is slightly lower than it would otherwise be.
To see the difference clearly, the same $150,000 in net business income produces different results depending on the tax structure.
As a single-member LLC, the full $150,000 is subject to self-employment tax. At 15.3 percent on the first $150,000 of net self-employment income, the self-employment tax is approximately $21,240. That comes before any income tax is applied.
As an S-corp with a $75,000 reasonable salary, the tax picture changes. Payroll taxes on the $75,000 salary come to approximately $11,475, split between the employee and employer sides. The remaining $75,000 is distributed as a shareholder distribution, which is subject to income tax but not self-employment tax or payroll taxes. The total payroll tax on the arrangement is $11,475 compared to $21,240 under LLC taxation, a difference of roughly $9,765.
Subtract the compliance costs associated with running an S-corp, payroll processing, the 1120-S tax return, and quarterly payroll filings, typically between $3,000 and $5,000 per year depending on the complexity and who prepares them, and the net annual savings in this example land somewhere around $5,000 to $7,000. At higher income levels, the savings scale accordingly.
Tip: The savings calculation is not a formula you can apply universally. It depends heavily on what the IRS considers a reasonable salary for your specific role, industry, and location. A salary set too low will attract IRS scrutiny, and a salary set too high eliminates most of the savings. Getting the salary right is the most consequential decision in the S-corp structure, and it is not one to estimate without real data.
The Qualified Business Income deduction, made permanent by the One Big Beautiful Bill Act signed in July 2025, allows eligible business owners to deduct up to 20 percent of qualified business income. Both LLCs and S-corps can qualify for this deduction, but it interacts differently with each structure in one important way.
For an S-corp owner, the W-2 salary paid does not count as qualified business income. Only the distribution portion flowing through the K-1 qualifies, which means that as the salary increases, the QBI deduction decreases. For LLC owners below the income phase-out thresholds, which begin at $75,000 for single filers and $150,000 for joint filers in 2026, the entire net profit from the business can potentially qualify for the 20 percent deduction.
This interaction does not eliminate the self-employment tax savings of the S-corp structure at most income levels, but it does reduce the savings somewhat and is worth factoring into the comparison. At lower profit levels, the QBI deduction available to an LLC owner can sometimes narrow the gap between the two structures more than the payroll tax savings can bridge it.
Tip: If your business qualifies as a specified service trade or business, which includes certain professional practices in health, law, accounting, and similar fields, the QBI deduction phases out above the income thresholds regardless of entity structure. Confirm your SSTB status with a CPA before building a tax plan around the QBI deduction.
The tax savings of the S-corp structure come with a compliance cost that the default LLC structure does not have. Understanding what that compliance looks like is essential to evaluating whether the savings justify the additional work and expense.
As a default LLC, the annual tax obligations are straightforward. A single-member LLC files a Schedule C with the personal return. A multi-member LLC files Form 1065 and issues K-1s to each member, and no payroll is required if the owners are not employees.
As an S-corp, the obligations expand considerably:
For most business owners working with a CPA, this compliance is manageable. But it is real work with real deadlines, and failing to meet those deadlines carries penalties. The failure-to-file penalty for a late Form 1120-S is $235 per shareholder per month as of 2026, up to 12 months.
Tip: When evaluating the cost of S-corp tax preparation services and payroll, ask your CPA for a full estimate of the annual compliance costs specific to your situation, not a generic range. The comparison between those costs and your projected self-employment tax savings is the decision.
The S-corp election is not the better answer for every business. There are situations where staying with the default LLC taxation is the right call.
When net profit is consistently below $50,000 to $60,000, the compliance costs of the S-corp structure typically exceed the payroll tax savings. The math simply does not work at lower income levels, and adding payroll processing and a separate S corporation tax return to a business that does not generate enough income to justify it is a net negative.
When the business has irregular or unpredictable income, the S-corp structure creates complications. Running payroll requires paying a consistent salary regardless of how the business performed in a given quarter. A business that earns $30,000 in Q1 and $5,000 in Q2 is not a natural fit for a fixed salary obligation.
When the business is primarily investment or rental income rather than earned income, the S-corp election produces little benefit. The payroll tax savings require active business income subject to self-employment tax in the first place. Passive income is not subject to self-employment tax under either structure, so there is nothing to save.
Tip: The right answer to LLC versus S-corp is not a permanent one. A business that does not qualify for the election today may qualify in two or three years as profit grows. The better question to ask your CPA is not which structure is right forever, but which structure is right for where the business is now and what conditions would trigger a reassessment.
Both the LLC and the S-corp election use pass-through taxation. Both provide liability protection when properly maintained. Both allow the owner to take advantage of the QBI deduction where they qualify. The practical difference is self-employment tax on profits above a reasonable salary, and whether the savings from eliminating that tax on the distribution portion exceed the cost of running a more complex compliance structure.
At TrueView CPA, we do this analysis for business owners and professionals across Dallas and Texas before making any recommendation. If you are operating as an LLC and want to know whether an S-corp election would reduce your tax bill, or if you are already an S-corp and want S-corp tax preparation and S-corporation tax filing services handled correctly, the conversation starts with your actual numbers.
Not sure whether an S-Corp or LLC is right for you? Schedule a call with our tax experts today.
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