S-Corp vs LLC: Which Saves You More on Taxes in 2026?

The S-Corp election is the most common tax move that small business owners overlook — and the most common one they make too aggressively. Here's the actual math for 2026.

The core difference

• LLC (default): 100% of net earnings are subject to self-employment tax (15.3%)
• S-Corp election: only your "reasonable salary" is subject to FICA (15.3% combined employer + employee). Distributions above salary are NOT subject to SE tax

That's it. The savings come from converting profit-above-salary from FICA-taxed wages into FICA-free distributions.

The breakeven math

S-Corp election adds these annual costs:

• Payroll service: ~$500–$1,200/year (Gusto, ADP, Rippling)
• Form 1120-S filing: ~$800–$1,800 more than a Schedule C
• State annual fees and franchise tax (CA charges $800/year minimum)

Roughly $2,000–$3,500/year in added overhead. You only come out ahead if your SE tax savings exceed this.

The simplified math

If your business profit is $P and your reasonable salary is $S, your SE/FICA tax is roughly:

• LLC: 15.3% × P × 0.9235 ≈ 14.13% × P
• S-Corp: 15.3% × S × 0.9235 + (overhead $3,000) ≈ 14.13% × S + $3,000

Breakeven: where (14.13% × P) = (14.13% × S + $3,000), or P − S ≈ $21,200.

In plain English: once your profit exceeds your reasonable salary by ~$25K-$40K, the S-Corp election starts saving meaningful money. Below that, the overhead eats the savings.

Most CPAs recommend the S-Corp election once net profit exceeds $50K-$80K.

What is "reasonable salary"?

Per IRS guidance, an S-Corp shareholder-employee must take a salary that reflects the fair market value of the work they do. Pay yourself $0 and take everything as distributions = guaranteed audit.

Common benchmarks:

• 50–60% of profit if you're solo
• BLS Occupational Employment Statistics for your role + region
• RC Reports or RC Salary Tool industry data

How to elect S-Corp

1. Form an LLC (or already have one) — single-member or multi-member, doesn't matter
2. File Form 2553 within 75 days of formation OR by March 15 to be effective for the current tax year
3. Set up payroll — Gusto, Rippling, ADP. They handle withholding and W-2.
4. File Form 1120-S each year + K-1s to shareholders

State complications

• California: minimum $800 franchise tax per year + 1.5% S-Corp tax on net income
• New York City: NYC doesn't recognize S-Corps for unincorporated business tax (UBT)
• Tennessee, New Hampshire: state tax on S-Corp distributions
• Texas: franchise/margin tax applies regardless of S-Corp election

Check your state's rules before electing.

When NOT to elect

• Profit under $50K — overhead exceeds savings
• You plan to seek VC funding — VCs prefer Delaware C-Corps
• You have non-resident-alien owners — they disqualify S-Corp eligibility
• You want > 100 shareholders or multiple stock classes

How Accountaxed helps

Accountaxed runs both LLC and S-Corp scenarios on your actual transaction data and shows you the side-by-side tax impact. If you do elect, the Tax Engine 2.0 generates Form 1120-S directly from your books.

Try the entity comparison tool → · See IRS S-Corp resources for official guidance.