LLC vs S-Corp Tax Comparison

LLC vs S-Corp: Which Business Structure Saves You More on Taxes?

One of the most common questions for small business owners and self-employed professionals is whether to operate as a single-member LLC (taxed as a sole proprietorship) or to elect S-Corp status. The answer depends almost entirely on how much you earn and how much you can reasonably pay yourself as a salary.

How LLC (Sole Prop) Taxes Work

As a sole proprietor or single-member LLC, you pay self-employment (SE) tax on 92.35% of your net business profit. The SE tax rate is 15.3% — composed of 12.4% for Social Security (on earnings up to $184,500 in 2026) and 2.9% for Medicare (uncapped). If your earnings exceed $200,000, an additional 0.9% Medicare surtax applies. You can deduct half of your SE tax when calculating your adjusted gross income.

How S-Corp Taxes Work

With an S-Corp election, you split your business income into two buckets: a “reasonable salary” (subject to FICA payroll taxes) and remaining distributions (not subject to FICA). The employer pays 7.65% and the employee pays 7.65% on the salary portion. By keeping your salary at a defensible but moderate level, the distributions escape the 15.3% payroll tax entirely.

The Trade-Off: Admin Costs

S-Corps require payroll processing, a separate corporate tax return (Form 1120-S), and often additional bookkeeping. These costs typically run $1,500–$5,000+ per year depending on complexity. If the payroll tax savings do not exceed these administrative costs, the S-Corp election is not worth it.

Standard Deductions (2026)

• Single: $16,100
• Married Filing Jointly: $32,200
• Married Filing Separately: $16,100
• Head of Household: $24,150

Key Takeaway

If your net business profit is consistently above $40,000–$50,000, modeling both scenarios with this calculator can reveal significant annual savings. Always consult a CPA to determine the right reasonable salary and to ensure compliance with IRS guidelines.