LLC vs. S corp: one is a business, the other is a tax election

An LLC is a business structure

A limited liability company is a business structure set up under state law. The IRS has no tax category called LLC. By default it treats a one-owner LLC as part of its owner for income tax, so the profit goes on Schedule C of your personal return. An LLC with two or more members is taxed as a partnership by default.

For employment tax, the IRS still treats a one-owner LLC as a separate entity. That matters once the business has an employee, and after an S election you are one.

An S corporation is a tax election

S corporations elect to pass their income, losses, deductions and credits through to their owners for federal tax. The owners report that income on their own returns, so it is not taxed twice.

To elect, a business must be a domestic corporation or an entity that can be taxed as one. It can have no more than 100 shareholders, only eligible ones (individuals, certain trusts and estates, but not partnerships, corporations or nonresident aliens), and one class of stock.

An LLC qualifies. An LLC that files a valid Form 2553 is treated as a corporation from the date the election takes effect, and it does not also file Form 8832. The election changes how the IRS taxes the business, not the structure your state set up. How to elect.

So the question is how your LLC is taxed

Owners often ask “LLC or S corp?” For one owner, the real choice is between two ways of taxing the same business: the default, where all of the profit carries self-employment tax, and the S election, where you take a salary and only the salary carries Social Security and Medicare tax.

What changes when a one-owner LLC elects

	Default (one-owner LLC)	After the S election
Tax on your earnings	Self-employment tax of 15.3% on 92.35% of net profit; the 12.4% Social Security part stops at $184,500 in 2026	Social Security (6.2%) and Medicare (1.45%) on your salary only, paid by the business and withheld from you at the same rates
How you are paid	Draws from profit	A salary through payroll that must be reasonable for your work, then distributions of the rest
Unemployment tax	None on you	Federal unemployment tax of 6.0% on the first $7,000 (0.6% after the usual state credit), plus state unemployment where your state covers owner-officers
Tax returns	Schedule C and Schedule SE with your Form 1040	Form 1120-S by the 15th day of the 3rd month after year end, a Schedule K-1 to you, Form 941 each quarter, Form 940 and a W-2 each year
20% QBI deduction	Figured on the business profit	Figured on the profit after your salary; your salary is not qualified business income
Health insurance the business pays	Deducted on your own return	Counts as your wages for income tax but not for Social Security and Medicare; you then deduct it on your own return
Late return penalty	None for the business	$260 per shareholder per month, up to 12 months, for returns due in 2027

What the difference can be worth

The same one-owner LLC in three places, single filer, 22% federal bracket, default payroll and return costs, 2026 rules. Each figure is total tax and added costs as an S corporation compared with staying as you are.

Profit / salary	Texas	California	New York City
$80,000 / $45,000	$735 lower	$148 lower	$2,035 higher
$120,000 / $60,000	$3,136 lower	$2,349 lower	$321 lower
$200,000 / $90,000	$7,916 lower	$6,149 lower	$6,919 lower

At $80,000 of profit the result is small in Texas and California and negative in New York City, which does not recognize the election. The gap grows with profit. Run your own numbers.

State and city rules

• Most states follow the federal election and need no form of their own.
• New York requires its own election, Form CT-6. New York City does not recognize the election and taxes S corporations under its General Corporation Tax.
• Washington, DC taxes S corporations as corporations: they file the D-20 franchise tax return.
• Tennessee and New Hampshire tax S corporations at the business level, Tennessee through franchise and excise tax and New Hampshire through its Business Profits and Business Enterprise taxes.
• California taxes S corporations at 1.5% of California net income, with an $800 minimum.
• New Jersey treats a federal S corporation as a New Jersey S corporation unless its shareholders elect otherwise.
• Philadelphia, Detroit and Kansas City, Missouri tax S corporations at the city level.

The calculator applies each state’s rules, and a guide for every state explains the rules that move its result.

Sources

Sources: 26 official pages

• IRS, Limited Liability Company (LLC) (page last reviewed 10-Oct-2026)
• IRS, S corporations (page last reviewed 11-Jun-2026)
• Instructions for Form 2553 (Rev. December 2020), Purpose of Form
• Rev. Proc. 2013-30, section 1
• IRS, Self-employment tax (Social Security and Medicare taxes) page
• SSA Office of the Chief Actuary, Contribution and benefit base (cbb.html), table 1937-2027 (read live in the desktop Chrome browser 2026-10-24; also matches the archive.org snapshot of 2026-10-20)
• IRS Publication 15 (2026), What’s New
• Schedule A (Form 940) 2025, instructions
• Instructions for Form 8995 (2025)
• P.L. 119-21, sec. 70105(a)(1), 139 Stat. 161
• Notice 2008-1
• IRS, S corporation compensation and medical insurance issues
• Instructions for Form 1120-S (2025), When To File
• Rev. Proc. 2025-32, sec. 4.56
• NY Tax Law §660(a); Form CT-3-S-I (2025)
• Form CT-6-I (12/20), When to make the election
• NYC Department of Finance, General Corporation Tax page
• DC OTR, 2025 D-20 Corporation Franchise Tax Forms and Instructions (revised 11/2025)
• Tennessee Department of Revenue, Form FAE170 Instructions (2025), Schedule J3
• RSA 77-A:1, III(b)
• FTB, S corporations
• 2025 CBT-100S General Instructions, Corporations Required to File
• PA Dept. of Revenue, REV-976 instructions (TR 11-22); Tax Reform Code of 1971 §401
• City of Philadelphia Dept. of Revenue, BIRT, Exemptions
• Michigan Treasury (administrator of Detroit’s income tax), Instructions for Form 5297, City of Detroit Corporate Income Tax Return, tax year 2025
• KCMO Revenue Division, Tax FAQs

Every figure was read on an official page and checked a second time. Checked October 24, 2026. How we check facts.

An explanation of public rules, not tax advice.