LLC vs. S-Corp: How the Taxes Actually Differ

Owners who ask us "should I be an LLC or an S-corp?" are asking a question that does not quite exist, because the two are not alternatives. An LLC is a legal entity you form with the state. An S-corp is a tax classification you ask the IRS for. A Florida LLC can stay a plain LLC for tax purposes or elect S-corp taxation, and the legal entity does not change either way.

What changes is how much of the profit is exposed to Social Security and Medicare tax. That is where the money is, and where the costs come from. Below we walk through the mechanics, then run the numbers at $80,000, $150,000 and $300,000 of profit to show where the election starts paying for itself.

An S-corp is a tax election, not an entity

By default the IRS ignores a single-member LLC (a "disregarded entity") and taxes the owner as a sole proprietor on Schedule C; a multi-member LLC is taxed as a partnership. Either way the profit lands on the owners' personal returns and they pay self-employment tax on it.

To be taxed as an S-corp instead, the LLC files Form 2553. For the election to apply to the current year, the form is due within two months and 15 days after the start of the tax year, mid-March for a calendar-year business. An LLC that files on time is treated as a corporation for tax purposes automatically, with no Form 8832 needed. Missed it? Late-election relief under Rev. Proc. 2013-30 is granted routinely with a reasonable-cause statement, up to three years and 75 days later.

Eligibility is rarely a problem for an owner-led business: 100 or fewer shareholders, all U.S. individuals (or certain trusts and estates), and one class of stock. Your operating agreement, Sunbiz registration and liability protection do not change.

Self-employment tax: the 15.3% that drives the whole decision

A sole proprietor or default-LLC owner pays self-employment tax on 92.35% of net profit at 15.3%: 12.4% for Social Security and 2.9% for Medicare. The Social Security piece stops at the annual wage base, $184,500 for 2026. The Medicare piece has no cap, and an extra 0.9% applies above $200,000 of earnings ($250,000 for joint filers). Half of it is deductible in computing adjusted gross income, which softens the blow without eliminating it.

The S-corp changes the rule. As a shareholder who works in the business, you become an employee. The corporation pays you a salary, and Social Security and Medicare tax (the same 15.3%, split 7.65% employee and 7.65% employer) is paid on that salary only. The remaining profit comes to you on Schedule K-1 as a distribution, and distributions are not subject to Social Security or Medicare tax at all.

So the savings are 15.3% (or 2.9% past the wage base) of the gap between profit and salary. The bigger the gap, the bigger the savings, which is why the IRS polices the salary.

The reasonable-salary requirement

You cannot pay yourself $10,000 and take $190,000 in distributions. An S-corp must pay reasonable compensation to any shareholder who provides services before it makes non-wage distributions, and the courts have repeatedly upheld the IRS's authority to reclassify distributions as wages and assess payroll taxes, penalties and interest. In David E. Watson, P.C. v. United States (8th Cir. 2012), a CPA who paid himself $24,000 a year while taking roughly $175,000 to $200,000 in distributions had his wages reset to $91,044.

"Reasonable" means roughly what you would have to pay someone else to do your job, based on your training, your hours, what comparable businesses pay, and how much of the profit comes from your labor rather than from employees and equipment. There is no IRS percentage rule; the "60/40 split" is folklore. We show how to build and document the number in S-corp reasonable salary: how much should you pay yourself?

What the election costs you: payroll, a second return and lost deductions

The election adds real overhead, which is where many "you'll save thousands" pitches fall apart.

Payroll. Once you are an employee, the company must run payroll: withhold income tax and FICA, deposit it on schedule, file Form 941 every quarter and Form 940 once a year, issue yourself a W-2 by January 31, and register for Florida reemployment tax (2.7% of the first $7,000 of wages for a new employer, so $189 a year) plus federal unemployment tax (0.6% of the first $7,000, or $42). It is a monthly discipline, and a late deposit draws a penalty of 2% to 15%.

A separate tax return. An S-corp files Form 1120-S, due the 15th day of the third month after year-end: March 16, 2026 for the 2025 year (the 15th fell on a Sunday) and March 15, 2027 for 2026. That is a month before your personal return, which cannot be filed until the K-1 exists. The late-filing penalty is $255 per shareholder per month for returns due in 2026, even when no tax is owed. A Schedule C business has none of this.

Lost deductions. The qualified business income (QBI) deduction is 20% of the profit that flows through on the K-1, never of your W-2 salary, so every dollar you move into salary loses its 20% deduction. You also trade the deduction for half of your self-employment tax for a deduction of the employer's share of payroll tax, which is smaller. The worked example shows how much this matters; The QBI deduction (Section 199A), explained covers the full rules.

Florida considerations

Florida makes the decision easier than most states. There is no personal income tax, so pass-through income from either structure is untaxed at the state level. Florida's 5.5% corporate income tax applies to C-corporations; an S-corp is not subject to it except in a year it owes federal corporate-level tax (built-in gains after a C-corp conversion, for example), and a disregarded single-member LLC files no Florida corporate return either.

What Florida adds is the same under both structures: the Sunbiz annual report due May 1 ($138.75 for an LLC, $150 for a corporation, $400 late fee either way) and reemployment tax once you have payroll. States with a personal income tax or entity-level taxes on S-corps change the math, so run the state layer before you elect if you have owners or operations elsewhere. Our guide to Florida business taxes lists what you still owe here.

Worked example: $80,000, $150,000 and $300,000 of profit

Assume a married owner filing jointly with no other household income, the 2026 standard deduction of $32,200, 2026 tax brackets, Florida's new-employer reemployment rate, and reasonable salaries of $55,000, $75,000 and $120,000 respectively. We also assume $2,000 a year of added cost for a payroll service and the separate 1120-S; your number may differ. The Additional Medicare Tax is left out; it adds a few hundred dollars to the sole-proprietor side at $300,000.

Two things stand out. At $80,000 the election is a wash: the salary has to be most of the profit anyway, so there is little left to shelter, and the overhead eats what remains. At $150,000 it clearly earns its keep. At $300,000 the raw savings are larger, but the sole proprietor's Social Security tax had already stopped at the $184,500 wage base, so the S-corp is mostly saving 2.9% Medicare tax above that line while giving up a much larger QBI deduction. The net is worth having, but it is not the $20,000 some online calculators promise. And the answer moves with the salary: at $300,000, a defensible salary of $150,000 instead of $120,000 costs roughly $4,600 more in payroll tax, which is why the salary decision, not the election itself, is where the planning happens.

Where the break-even sits

The election starts making sense when profit reliably exceeds a reasonable salary by enough that 15.3% of the gap comfortably beats the overhead plus the lost QBI deduction. In our practice that means net profit consistently above roughly $80,000 to $100,000 for a single-owner service business, with at least $40,000 left after a defensible salary. Under $60,000 of net profit, the election is not worth the payroll overhead, and a business with volatile profit should wait a year rather than elect on a hopeful forecast.

Also hold off if you plan to bring in an investor who is not a U.S. individual, or if you want to maximize a retirement plan contribution, which for an S-corp owner is limited to 25% of W-2 salary. S-corp profit is taxed to you whether or not you take it out, so the election defers nothing.

What usually goes wrong

The mistakes we clean up most often are the same few. Owners elect and then never run payroll, so the first 1120-S shows $200,000 of profit and $0 of officer compensation on line 7, the most visible red flag on the form. Owners set the salary by feel, with no comparable-pay data on file. Owners forget the March due date and pay a per-shareholder penalty on a return that owed no tax. And multi-owner S-corps take distributions unevenly, which can raise a second-class-of-stock problem that puts the election at risk.

The quieter mistake is electing too early. A $70,000 business that elects adds payroll, a second return and a monthly bookkeeping burden to save a few hundred dollars. If that is you, stay a default LLC (see single-member LLC taxes explained) and revisit when profit is consistently in six figures.

When to get help

The election deserves a proper projection before you file Form 2553, not after. We build the comparison with your actual profit, a documented salary, your filing status and other household income, looking at the next two or three years rather than one. If it makes sense, we handle the filing, set up payroll, and prepare the 1120-S and your personal return together through our business tax planning and preparation service, with payroll and W-2 support month to month.

If you already elected and have never run owner payroll, or you set a salary years ago and have not looked at it since, have that conversation before year-end while there is time to fix it. Request a 20-minute fit call and bring your latest profit and loss statement; that is usually enough to tell whether the election is paying for itself.

Jenny Gao, CPA, EA

Founder of Balance Partners. Florida-licensed CPA and IRS Enrolled Agent with more than a decade of accounting and tax experience. Jenny writes and reviews every guide on this site. About Jenny

This article is general educational information for U.S. business owners and is not accounting, tax, legal, payroll or financial advice for your situation. Rules change and vary by entity, state and facts. Balance Partners, LLC does not provide audit, review or other attest services. Last reviewed September 14, 2026.