LLC vs S corp: what is actually different

"LLC or S corp" is a question that mixes two different things. An LLC is a legal entity you form with your state. An S corp is a federal tax status. An LLC can be taxed as an S corp, and a lot of small business owners who say they "have an S corp" in fact have exactly that.

The LLC is the legal part

You form an LLC by filing with the state. It gives you a separate legal entity, which is meant to keep the business's debts separate from your own.

For tax, the IRS LLC page says a single-member LLC is disregarded by default: its profit goes on your personal return on Schedule C, as if you were a sole proprietor. A multi-member LLC is a partnership by default. Either can choose to be taxed as a corporation instead.

The S corp is the tax part

To be taxed as an S corp, the LLC files Form 2553. The Form 2553 instructions say an LLC that does this is treated as a corporation from the date the election takes effect and doesn't need to file Form 8832 first. A corporation formed under state law can file the same form.

Nothing about the legal entity changes. Same name, same state filings, same liability protection. What changes is how the IRS taxes the profit.

What the election changes

The saving comes from one line: Social Security and Medicare stop applying to the profit above your salary. But the IRS says S corporations must pay reasonable compensation to an owner who works in the business, so you can't set the salary at zero.

What the election costs

• Payroll. A payroll service, or your own time, for monthly deposits and quarterly returns. Plus federal and state unemployment tax on your salary.
• A second tax return. Form 1120-S is due by the 15th day of the 3rd month after year end, per the Form 1120-S instructions. That is mid-March for a calendar year, a month before your own return.
• State taxes on S corps. California charges S corps 1.5% of net income with an $800 minimum. Tennessee charges LLCs and S corps alike its 6.5% excise tax, so the election changes nothing there at the state level. New York and New Jersey need a separate state election.
• A smaller QBI deduction, since salary doesn't count as qualified business income.

StructureCost puts the payroll service and the 1120-S together at $1,800 a year by default. That is an estimate, not a price list.

Worked example: $100,000 profit in Texas

A single owner, no other income, 2026 federal figures. Texas has no personal income tax, and at this revenue the Texas franchise tax is zero either way. The S corp case uses a $40,000 salary.

The S corp saves $4,535.07 here. Income tax goes up under the S corp, mostly because the QBI deduction applies to $54,855 of profit left after salary and costs instead of the whole business. The payroll tax saving is larger than that.

When it pays

There is no break-even profit that works everywhere. It moves with:

• Your salary. A higher reasonable salary means less saving. A consultant whose profit all comes from their own hours may need a high one.
• Your state. California's 1.5% tax and $800 floor, New York City's General Corporation Tax on S corps, and DC's refusal to recognize S corps all cut the gain.
• Profit above the Social Security wage base. Past $184,500 of earnings the 12.4% part stops, so the saving per extra dollar shrinks to the Medicare part.
• Your fixed costs. At $40,000 of profit, $1,800 of admin and a $30,000 salary leave little room.

The safe way to decide is to put your own numbers in the calculator with your state, check the salary against what you would pay someone else, and look at the S corp and LLC totals side by side.