LLC vs S Corporation in 2026: which saves your business more tax?

First, LLC and S Corp aren't the same kind of thing

An LLC is a legal entity created under state law. An S Corporation is a federal tax election. An LLC can be taxed as a sole proprietorship (single member), a partnership (multiple members), a C Corporation, or, by filing an election, an S Corporation. So the real question is usually: should my LLC elect S Corporation status?

How a default LLC is taxed

Profits pass through to the owners' personal returns. Active owners generally pay self-employment tax (Social Security and Medicare, 15.3% up to the Social Security wage base and 2.9% above it, plus an extra 0.9% Medicare tax for higher earners) on their share of the profits, as well as income tax.

How an S Corporation changes things

With an S Election, owners who work in the business are paid a reasonable salary through payroll, which carries Payroll Taxes. Remaining profits can be paid as distributions, which are not subject to self-employment or Payroll Tax. That difference is where the savings come from.

The QBI Deduction is now permanent

The 2025 tax law made the 20% Qualified Business Income (QBI) deduction under Section 199A permanent, and widened the income range over which its limits phase in. S Corporation salaries don't count as QBI, so a very high salary can reduce the deduction, while a very low one invites IRS scrutiny. Finding the right balance is part of the planning.

When an S Election tends to make sense

• Profits comfortably above what a reasonable salary for your role would be
• You're willing to run payroll and file a separate business return
• Your state doesn't add costs that outweigh the federal saving
• All owners are eligible shareholders: US citizens or residents and certain trusts, with no more than 100 shareholders and one class of stock

What about a C Corporation?

C corporations pay a flat 21% federal rate, but profits can be taxed again when distributed as dividends. They can suit businesses reinvesting most profits, raising outside investment, or planning for the qualified small business stock exclusion, which the 2025 law expanded for stock issued after July 4, 2025.

Timing the election

An S Election is made on Form 2553, generally within two months and 15 days of the start of the tax year it's to apply to. Late election relief is available in many cases, but it's simpler to plan ahead, ideally before year-end.

Frequently asked questions

This article is general information, not tax, legal or accounting advice. Tax rules change and outcomes depend on your specific facts; speak with a qualified tax professional before acting.