Guide · start here

What is an S corp, and why would you want one?

An S corporation is a way the IRS taxes a business, not a kind of business. Owners elect it for one main reason: it can lower the Social Security and Medicare tax on their own earnings. This page explains how, in plain terms, and when it doesn’t pay.

Updated October 24, 202617 official sources

In short

An S corp is a federal tax status. An LLC or a corporation elects it on Form 2553.
Today, you pay Social Security and Medicare tax on almost all of your profit.
After the election, those taxes apply to your salary only. The rest of the profit reaches you without them.
The election adds payroll, a second tax return and, in some places, extra taxes. Below a certain profit, those cost more than they save.

An S corp is a tax status, not a type of business

When people say “S corp,” they mean a business that has elected to be taxed under Subchapter S of the tax code. The business is still the LLC or corporation you formed in your state. The election changes how the IRS taxes it.

An S corporation passes its income, losses, deductions and credits through to its owners. The owners report them on their own returns, so the same profit is not taxed twice.

To elect, a business must be a domestic corporation, or an LLC 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. A one-owner LLC owned by a U.S. citizen or resident meets these rules. LLC vs. S corp explains the difference between the two in more detail.

Why owners elect it: the tax on your own pay

As a sole proprietor or one-owner LLC, you pay self-employment tax on your profit: 15.3% on 92.35% of it. That is Social Security (12.4%) and Medicare (2.9%), both the employer’s share and the employee’s, because you are both. The Social Security part stops at $184,500 of earnings in 2026. Medicare has no cap.

With an S election, the business pays you a salary through payroll. Social Security and Medicare apply to that salary: 6.2% and 1.45% paid by the business, and the same withheld from your pay. The profit left after your salary can come to you as a distribution, and a distribution carries no Social Security or Medicare tax.

That split is the whole idea. The tax on your pay does not go away. It applies to a smaller amount: your salary instead of your whole profit.

An example, line by line

A one-owner LLC in Texas with $120,000 of profit pays its owner a $60,000 salary. The owner files single and is in the 22% federal bracket. The calculator compares a year as it is today with the same year as an S corporation:

	Line	Amount
1	Self-employment tax today	$16,955
2	Payroll taxes on your salary (Social Security, Medicare, federal unemployment)	$9,222
3	State and city taxes and fees after the election, minus before	$243
4	Added costs (payroll service, extra tax return)	$1,311
5	Change in your federal income tax at your bracket	$3,043
6	Difference (line 1 − 2 − 3 − 4 − 5)	$3,136 lower

Line 1 is the tax the election saves. Lines 2 to 4 are what it adds back: payroll taxes on the salary, any state or city taxes, a payroll service and the second tax return. Line 5 is a change in income tax that surprises many owners: your salary does not count toward the 20% qualified business income deduction, so a salary can raise your income tax a little even as it lowers the payroll tax.

What the election costs

Payroll. You become an employee of your own business: a salary with taxes withheld, quarterly Form 941 returns, an annual Form 940 and a W-2 for you each January.
A second tax return. The business files Form 1120-S each year, with a Schedule K-1 to you. For a calendar year, it is due March 15.
Unemployment tax on your salary. Federal unemployment tax, and in most states, state unemployment tax too.
State and city taxes in some places. California charges 1.5% of S-corporation income, with an $800 minimum. New York City and Washington, DC, do not recognize the election at all.
A reasonable salary. The IRS expects you to pay yourself fairly for the work you do. It can treat distributions as wages when the salary is too low. Reasonable salary covers what it looks at.

When it starts to pay

The saving grows with your profit. Most of the costs do not. So at a low profit, the election costs more than it saves, and as profit rises, the saving takes over. Where that happens depends on your state, your salary and your costs.

The table runs the calculator for a single filer in the 22% bracket, with default payroll and tax-prep costs and a salary of roughly half the profit. Each figure is total tax and added costs as an S corporation, compared with staying as you are:

Profit / salary	Texas	California	Illinois
$40,000 / $25,000	$749 higher	$1,076 higher	$1,081 higher
$60,000 / $35,000	about even	$464 higher	$454 higher
$80,000 / $45,000	$735 lower	$148 lower	$174 lower
$100,000 / $50,000	$2,394 lower	$1,743 lower	$1,653 lower
$120,000 / $60,000	$3,136 lower	$2,349 lower	$2,281 lower
$200,000 / $90,000	$7,916 lower	$6,149 lower	$6,471 lower

Read down a column. The lower profits show the election costing more. The saving appears as profit rises, and it appears later in states with their own S-corp taxes or fees. Your own numbers move the line, which is why the calculator asks for them.

See what the election would do for your business.Profit, state and salary. Two minutes, nothing sent anywhere.

Open the check

Payroll versus owner’s draw

Today, when you take money out of your business, it is an owner’s draw. A draw is not pay, and you are not taxed when you take it. You pay tax on the business’s profit, whether you draw it out or leave it in.

After the election, money reaches you in two ways. Your salary runs through payroll on a regular schedule, with taxes withheld. The rest of the profit can come out as distributions. The order matters: the IRS expects a reasonable salary for your work first, and it can treat distributions as wages when the salary is too low.

So the salary becomes the main decision in running an S corporation. Every dollar of salary carries payroll tax, and a salary set too low for the work is a risk. The salary finder in the calculator shows what people in your job earn in your state, as evidence for a reasonable figure.

When it may not fit

Profit is low or uneven. Payroll and the second return cost money every year, whether or not the profit comes.
You work in New York City or Washington, DC. Neither recognizes the election, so their taxes on the business continue as if you had not made it.
You want to avoid payroll and paperwork. Running payroll for yourself and filing a second return is real, ongoing work.
You plan to bring in a company as an owner. An S corporation cannot have a partnership or corporation as a shareholder, and it can have only one class of stock.

How to elect

The business files Form 2553 with the IRS. For a calendar-year business, the election takes effect for this year if it is filed by March 15. Electing S corp status walks through the form, the deadline, late relief and the state steps.

Sources

Sources: 17 official pages

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.

Keep reading

Related guides and tools

Guide