S-Corp vs. LLC: How the Election Actually Changes Your Taxes
Sam's List Editorial | 2026-06-27
S-Corp vs. LLC: How the Election Actually Changes Your Taxes The most common confusion here is that an LLC and an S-corp are not the same kind of thing. An LLC is a legal business structure; an S-corp is a tax election that certain businesses, including many LLCs, can choose. Making the S-corp election can reduce self-employment tax for profitable businesses, but it adds payroll requirements and only pays off above a certain income. Here is how the election actually changes your taxes, with a worked example. Understanding the distinction is the key that unlocks the rest. You are not choosing between two structures so much as deciding whether to layer a tax election on vetted of your structure. LLC: A Legal Structure An LLC, or limited liability company, is a legal entity that separates your personal assets from the business, offering liability protection. By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership, meaning the profits flow through to the owners' personal returns, where they are subject to income tax and self-employment tax. That self-employment tax, covering Social Security and Medicare, is where the S-corp election comes in. S-Corp: A Tax Election An S-corp is not a separate structure you form so much as a tax status you elect, available to eligible LLCs and corporations. The defining feature for tax purposes is how owner pay is treated. An S-corp owner who works in the business must pay themselves a reasonable salary, which is subject to payroll taxes, but the remaining profits can be taken as distributions that are generally not subject to self-employment tax. That split, salary versus distributions, is the entire source of the potential savings, and also the source of the rules you have to follow. How the Election Changes the Math Under a default LLC, essentially all net profit is subject to self-employment tax. Under an S-corp election, only the salary portion is subject to payroll taxes, while distributions are not. For a profitable business, that can mean meaningful savings. Here is a simplified, illustrative example. Suppose a business nets $120,000 in profit. Default LLC S-corp election (illustrative) Subject to self-employment / payroll tax ~$120,000 Reasonable salary, e.g. ~$70,000 Taken as distributions (no SE tax) $0 ~$50,000 In this illustration, the S-corp owner pays payroll taxes on the salary but not on the $50,000 of distributions, which is where the savings come from. The exact numbers depend entirely on what counts as a reasonable salary and your specific situation; this...
