By Income Tax Service Editorial — Reviewed by Diyan Yap, EA (IRS Enrolled Agent) — Updated July 19, 2026
Quick answer: An LLC and an S-corp usually pay the same income tax — the difference is self-employment tax. An S-corp election lets owners split profit into salary (subject to 15.3% payroll tax) and distributions (not), which can save thousands once profits are strong. OBBBA made the 20% QBI deduction permanent and restored 100% bonus depreciation, which changes the modeling — but the reasonable-salary requirement still decides whether the election is worth it.
Key facts:
- Self-employment tax: 15.3% (12.4% Social Security up to the annual wage base + 2.9% Medicare)
- Default LLC taxation: all net profit is subject to SE tax; S-corp election: only the owner’s salary is
- The IRS requires S-corp owner salaries to be reasonable compensation for the work performed
- QBI deduction (20%) is now permanent with wider phase-in ranges ($75,000 single / $150,000 MFJ) — it applies to both LLCs and S-corps
- S-corps add real costs: payroll processing, a separate corporate return, and stricter formalities
What’s actually different between an LLC and an S-corp?
Less than the internet suggests. An LLC is a legal structure; S-corp is a tax election — most S-corps are just LLCs that filed a form. Both are pass-throughs: profit lands on your personal return either way, taxed at your regular 2026 bracket rates.
The real difference is self-employment tax. A default LLC owner pays SE tax (15.3% up to the Social Security wage base, 2.9% Medicare above it) on essentially all business profit. An S-corp owner is an employee of the business: salary gets payroll tax, but profit distributions above the salary don’t.
That split is the entire game — and it only works because of one constraint the IRS polices hard: the salary must be reasonable for the work you actually do.
How much can an S-corp election save? (worked example)
Marcus runs a consulting LLC that nets $120,000. To keep the mechanics visible, we’ll apply the full 15.3% rate throughout (real returns apply SE tax to slightly less than all net earnings and cap the Social Security piece at the annual wage base, so actual gross savings typically land 15–20% below this simplified illustration):
As a default LLC:
- SE tax ≈ 15.3% × $120,000 = $18,360
With an S-corp election, paying himself a reasonable $70,000 salary:
- Payroll tax: 15.3% × $70,000 = $10,710
- Remaining $50,000 taken as distributions: no SE/payroll tax
- Gross savings ≈ $7,650 per year
Net savings are smaller: subtract payroll service fees, the S-corp tax return, possibly state franchise taxes and bookkeeping upgrades — commonly a few thousand dollars a year all-in. The election earns its keep when the payroll-tax savings comfortably clear those costs, which is why profit level is the first screening question.
What is “reasonable compensation” — and why does it decide everything?
The IRS knows the obvious cheat: pay yourself a $12,000 salary on $120,000 of profit and shelter the rest. Reasonable compensation is the anti-cheat rule — your salary must reflect what you’d pay someone else to do your job, considering your hours, duties, skills, and what comparable businesses pay.
Practical guardrails:
- Document the number: job duties, market salary data for your role and region, hours worked. A file you build once a year beats an argument you improvise in an audit.
- Salary rises with profit and involvement. A $700,000 practice with a $60,000 owner salary is a flag, not a strategy.
- Zero-salary years with distributions are the classic audit trigger. If cash came out and you worked, some of it was wages.
- Underpaying doesn’t just risk tax and penalties — it also reduces the Social Security earnings record your future benefits are computed from. Cheap salary now, smaller check later.
How did OBBBA change the S-corp math?
Three changes worth modeling — all covered in depth in our companion guides:
| OBBBA change | Effect on the LLC vs S-corp decision |
|---|---|
| QBI deduction permanent, wider phase-in | The 20% deduction now permanently favors both structures — but salary reduces pass-through profit (your QBI), while W-2 wages help higher earners clear the wage limitation. The salary line moves two levers at once. |
| 100% bonus depreciation restored | Big equipment years can crush taxable profit — sometimes below where an S-corp election pays for itself that year, and below QBI thresholds where SSTB limits bite less. |
| Permanent bracket structure | Multi-year planning is more predictable; entity decisions can be made on 5-year math instead of expiring-provision panic. |
The honest takeaway: OBBBA didn’t crown a winner. It made the interactions — salary level × QBI × depreciation × payroll tax — richer, which rewards actually running the numbers over copying a YouTube rule of thumb.
When is the S-corp election the wrong move?
- Modest or unpredictable profit. When payroll costs, extra returns, and admin eat most of the payroll-tax savings, the election is overhead with a fancy name. As profit falls toward what a reasonable salary would be anyway, savings approach zero by definition.
- Nearly all profit is really your labor. If a reasonable salary for your work ≈ your whole profit, there’s nothing left to distribute tax-free.
- Heavy reinvestors who leave cash in the business and already zero out income with Section 179/bonus depreciation may find little SE-taxable profit to shelter in the first place.
- Certain rental owners: rental real estate income generally isn’t subject to SE tax anyway — an S-corp election solves a problem landlords don’t have, while creating basis and transfer headaches real estate investors specifically want to avoid.
- States with harsh franchise taxes on S-corps can flip a marginal federal win into a net loss.
What should you do now?
- Screen with one number: estimate profit minus a defensible salary for your role. If the distribution slice is thin, revisit next year — no harm done.
- Already an S-corp? Mid-2026 is the time to true up salary against year-to-date profit — not December, when payroll corrections get ugly, and not never.
- Weigh the quarterly estimated-tax mechanics — S-corp owners run payroll withholding plus estimates on distributions; the cash-flow rhythm changes.
- Model it properly once. An IRS Enrolled Agent can run LLC-vs-S-corp with your real numbers — salary scenarios, QBI, depreciation plans, state costs — in a single working session. The election is made with the IRS on a deadline, so do the math before the year you want it to apply.
FAQ
Does an S-corp pay less income tax than an LLC? Generally no — both are pass-throughs taxed at your personal rates. The savings, when they exist, come from self-employment/payroll tax on the distribution slice, not from income tax rates.
Can I just pay myself a tiny salary and take everything as distributions? No. Reasonable compensation is required, and low-salary/high-distribution patterns are the S-corp audit profile. The strategy only works with a defensible salary.
Do I lose the QBI deduction if I elect S-corp? No — S-corp profit passes through as QBI too. But your salary isn’t QBI, so raising it shrinks the 20% deduction base (while potentially helping the W-2 wage limitation at higher incomes). It’s a dial, not a cliff.
Should my rental properties be in an S-corp? Almost never for the SE-tax reason — rental income generally isn’t subject to SE tax anyway, and S-corps create real problems for getting appreciated property out later. Ask before you move deeds.
Is there a profit level where S-corp automatically makes sense? No universal number — it depends on what a reasonable salary is for your work, your state’s costs, and your other deductions. The right threshold falls out of your own numbers in about an hour of modeling.
Can I undo an S-corp election if it stops making sense? Elections can be revoked or terminated, but timing rules and consequences apply — treat it as a planned exit with professional guidance, not a form you casually flip back.
Sources
- IRS: One Big Beautiful Bill provisions for individuals and workers
- IRS: Estimated taxes for the self-employed
- IRS: Tax inflation adjustments for tax year 2026
This article is for educational purposes only and is not tax, legal, or financial advice. Tax rules change and individual situations vary — consult a qualified tax professional about your specific circumstances.