"LLC" is a legal structure under state law; "S corporation" and "C corporation" are federal tax classifications. Choosing the right combination can change your total tax by thousands of dollars a year.
How an LLC is taxed by default
- Single-member LLC: a "disregarded entity". Profit goes on Schedule C of your Form 1040 and is subject to income tax plus 15.3% self-employment tax.
- Multi-member LLC: taxed as a partnership. It files Form 1065 and gives each member a Schedule K-1.
- An LLC can instead elect to be taxed as a corporation (Form 8832) or as an S corporation (Form 2553).
S corporation
An S corporation files Form 1120-S and generally pays no federal income tax itself; profit passes through to shareholders on Schedule K-1. Shareholders who work in the business must receive reasonable compensation as W-2 wages, which are subject to payroll (FICA) taxes. Remaining profit distributed to owners is not subject to self-employment tax, which is where the savings come from. S corporations may have no more than 100 shareholders and one class of stock, and shareholders must generally be U.S. citizens or residents.
C corporation
A C corporation files Form 1120 and pays a flat 21% federal tax on its taxable income. When profits are paid out as dividends, shareholders pay tax again (qualified dividends at 0%, 15% or 20%, plus the 3.8% net investment income tax at higher incomes). This "double taxation" can still make sense when profits are reinvested in the business.
Example: $100,000 of profit, single owner
| Sole prop / LLC | S-Corp ($50,000 salary) | |
|---|---|---|
| Self-employment or payroll tax | about $14,130 (15.3% of 92.35% of profit) | $7,650 (15.3% of salary) |
| Income tax base | Profit minus half of SE tax | Salary plus pass-through profit |
The S-Corp saves roughly $6,500 of payroll tax here, before the cost of running payroll, a separate return and state fees. Both pass-through options may also qualify for the 20% qualified business income (QBI) deduction; for 2026 it starts to be limited above $201,750 of taxable income ($403,500 joint).
Compare all three with your own numbers, including state tax and QBI limits.
Open the business calculatorRelated: Self-employment tax explained and quarterly estimated taxes.
Official sources
- IRS: Limited liability company (LLC)
- IRS: S corporations
- IRS: Forming a corporation
- IRS: Qualified business income deduction
Educational information, not tax advice.
More guides
- How to file Form 1040 yourself for free (2026 guide)
- Self-employment tax explained: rates, wage base and how to calculate it
- Quarterly estimated taxes: 2026 due dates, safe harbor and how to pay
- State income tax by state: 2026 overview of rates and no-tax states
- New deductions for 2025-2028: no tax on tips, overtime, seniors and car loan interest