Do You Pay More Taxes as an LLC or an S Corp?

The honest answer is that you pay the same income tax either way, and a different self-employment tax. That distinction is the entire game. Both an LLC and an S corp are pass-through structures, meaning the business itself pays no federal income tax and the profit flows to your personal return where it is taxed at your individual rate. On the income tax line, the two are effectively identical. Nobody saves federal income tax by electing S corp status.

Where they diverge is the 15.3 percent self-employment tax, and that single line item is the reason the question gets asked at all. A profitable LLC taxed under its default rules pays self-employment tax on every dollar of profit. An S corp pays the equivalent payroll tax only on the salary portion, leaving distributions outside that layer. Understanding exactly where the savings come from, and where they do not, is the difference between a smart election and a costly one.

On Income Tax, an LLC and an S Corp Are the Same

Start with what does not change, because it eliminates half the confusion. Both structures are pass-through entities. A default LLC reports profit on your Schedule C or on a partnership return that flows through to you. An S corp reports on Form 1120-S and passes income to you on a Schedule K-1 under IRC § 1366. In both cases, the business pays no entity-level federal income tax, and you pay individual income tax on the profit at your marginal rate.

This means the federal income tax you owe on, say, 150,000 dollars of business profit is the same whether you are a default LLC or an S corp. Your tax bracket does not change. Your deductions do not fundamentally change. The qualified business income deduction under IRC § 199A is available to both structures, subject to the same limitations. If someone tells you the S corp election lowers your income tax, they are either confused or describing the self-employment tax and calling it the wrong name.

So the question "do you pay more taxes as an LLC or an S corp" cannot be answered on the income tax line, because there is no difference there. It can only be answered on the self-employment tax line, which is a separate tax with its own rules.

The Self-Employment Tax Is the Entire Difference

Self-employment tax exists under IRC § 1401 to fund Social Security and Medicare for people who are not regular W-2 employees. The combined rate is 15.3 percent: 12.4 percent for Social Security on earnings up to the annual wage base, which was 176,100 dollars in 2025 and adjusts each year, plus 2.9 percent for Medicare on all earnings with no cap. For a default LLC, this tax applies to the entirety of your net earnings from self-employment as defined in IRC § 1402.

That is the cost a default LLC carries. If your single-member LLC nets 120,000 dollars, you owe roughly 16,000 to 17,000 dollars in self-employment tax before income tax even enters the calculation. There is no mechanism within default LLC taxation to reduce it, because all of the profit is treated as self-employment earnings.

The S corp election breaks the profit into two pieces, and only one of them carries the tax. You pay yourself a reasonable W-2 salary, which is subject to FICA payroll tax under IRC § 3121 (the employer-and-employee equivalent of the 15.3 percent rate). The remaining profit comes to you as a distribution, and S corp distributions are not subject to self-employment or payroll tax. That treatment traces back to longstanding IRS guidance, including Rev. Rul. 59-221, which held that an S corp shareholder's pass-through income is not self-employment income. The salary is taxed like wages. The distribution escapes the 15.3 percent layer entirely.

The Real Math Depends on Your Salary

Because the savings come entirely from the distribution bucket, the size of that bucket determines whether you actually pay less tax as an S corp. Take an LLC netting 150,000 dollars. As a default LLC, the full 150,000 dollars is exposed to self-employment tax, costing roughly 19,000 to 21,000 dollars. Elect S corp status, pay a reasonable salary of 70,000 dollars, and only that 70,000 dollars carries payroll tax, while the remaining 80,000 dollars comes through as distribution outside the tax. The payroll tax on 70,000 dollars is roughly 10,700 dollars, so the gross saving on the spread is meaningful, often in the range of 8,000 to 10,000 dollars per year before costs.

But the salary is not a number you get to invent. The reasonable compensation requirement, enforced through the authority interpreting IRC § 3121 and cases like David E. Watson, P.C. v. United States, requires that your salary reflect what the market would pay someone doing your job. Pay yourself too little to inflate the distribution, and the IRS can reclassify the distributions as wages, assess back payroll tax, and add penalties. In a high-wage profession where a reasonable salary might be 130,000 dollars, an LLC netting 150,000 dollars has only 20,000 dollars of distribution to shield, and the savings shrink to the point where the election may not be worth the trouble.

The S corp also introduces costs that offset the savings. You now run payroll, file a separate Form 1120-S, and pay higher accounting fees. In California, you also pay the 1.5 percent franchise tax on S corp net income under California Revenue and Taxation Code section 23802, which a default single-member LLC does not owe. On 150,000 dollars of net income, that California tax is roughly 2,250 dollars. The federal saving still usually wins, but the state tax and the compliance costs are real subtractions that the simple version of the pitch leaves out.

So Which One Actually Pays More?

Below the profit threshold, you pay less, all in, as a default LLC, because the modest self-employment tax savings of the S corp are swallowed by payroll administration, the separate return, and California's 1.5 percent tax. Most practitioners put that threshold between 40,000 and 60,000 dollars of net profit, though the exact figure depends on how high your reasonable salary has to be.

Above the threshold, you generally pay less as an S corp, and the gap widens as profit grows, because the compliance costs are largely fixed while the distribution bucket (and therefore the self-employment tax you avoid) grows with the business. A founder netting 250,000 dollars with a reasonable salary of 100,000 dollars shields 150,000 dollars from the 15.3 percent layer, and the annual saving comfortably clears every added cost.

One more variable can tilt the comparison, and it is one most owners overlook: the qualified business income deduction under IRC § 199A. Because that deduction can be limited by the W-2 wages a business pays once your income passes certain thresholds, the salary you run through an S corp can, for a non-service business, actually support a larger 199A deduction than a wageless default LLC would. For a specified service business, the deduction phases out at higher income no matter how you are structured, so this benefit may not apply to you at all. The lesson is that the true all-in tax comparison is not just self-employment tax versus payroll tax. It includes how each structure interacts with the rest of your return, which is why a clean side-by-side projection beats a rule of thumb.

The clean way to hold the answer in your head is this. You never pay more or less income tax based on the LLC-versus-S-corp choice. You pay self-employment tax on all of your profit as a default LLC, and only on your salary as an S corp. Whether that difference is worth capturing depends on your profit, your reasonable salary, and the California costs, which is precisely the calculation worth doing before you file rather than after.

Related reading: which is best, LLC or S corp, is it better to be a sole proprietor or S corp, the disadvantages of an S corporation, the downside of being an S corp. For the full practice overview, see our S-Corp Attorney page.

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The LLC-versus-S-corp tax comparison comes down to your specific salary and your specific profit, and the answer is different for a consultant than for an agency owner. Delina runs that math against your real numbers and your California exposure.

If you're ready to know exactly how much the election would save or cost you, book a paid intake with Delina. This is not a free call. It is a focused, strategic session with an attorney who has read everything above and has specific opinions about your situation.