LLC vs S-corp Guide (US)
A plain-English guide to the payroll-tax tradeoffs between an LLC and an S-corp.
Updated: 2026-01-23
If you are comparing an LLC (taxed as a sole proprietorship) to an S-corp, the main difference is payroll tax. LLC profit is subject to self-employment tax. An S-corp pays payroll tax on a reasonable salary and can take the rest as distributions (usually no payroll tax). See Schedule SE and the IRS S-corp overview.
Last reviewed: January 23, 2026.
Start with payroll tax math, then layer in admin costs, state fees, and QBI. The calculator handles the first step.
Key takeaways
- The payroll tax gap is real. It is just not the whole decision.
- Reasonable salary rules still apply to S-corps.
- Admin costs and state fees can wipe out the savings at lower profit levels.
When an S-corp tends to make sense
- Net profit is high enough to justify payroll and compliance costs.
- You can defend a reasonable salary with documentation.
- Your state does not add heavy S-corp fees or taxes.
When staying an LLC is usually simpler
- Profit is still small or inconsistent.
- You want to avoid payroll services and extra filings.
- You do not want to manage reasonable compensation rules yet.
Decision checklist
- What is my realistic annual net profit range?
- What salary would my CPA defend for my role?
- What are the annual payroll + tax prep + state fees?
- Does the S-corp election deadline align with my timeline?
- How would the change affect QBI or other deductions?
Questions to ask your CPA
- What salary range should we defend for an audit?
- How do state fees change the break-even point?
- Does an S-corp election change QBI or retirement options?
- What is the cleanest effective date for the election?
Related tools
Related resources
Compliance note
This guide is for planning and coordination only. It does not provide tax or legal advice. Confirm eligibility and calculations with a qualified professional.
Sources
- IRS: Schedule SE (Self-Employment Tax)
https://www.irs.gov/forms-pubs/about-schedule-se-form-1040 - IRS: S corporations
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations - IRS: Instructions for Form 2553
https://www.irs.gov/instructions/i2553
Next steps
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