LLC versus S corp, in plain language
An LLC is formed under state law. An S corporation is a federal tax election. One company can be both.
General information, not tax or legal advice. Nothing here tells you to form an entity or to elect S status. Reasonable compensation, eligibility, and state fees are outside this page.
Two different systems
A limited liability company is created by filing with a state. The state filing does not, by itself, pick a federal income-tax regime. A single-member LLC is often disregarded for federal income tax, so the activity is reported on the owner’s return like a sole proprietorship. An LLC with more than one member is often treated as a partnership. Either can elect corporate tax treatment.
An S corporation is not a state filing. It is a federal election, Form 2553, by a corporation or by an eligible LLC that has elected to be taxed as a corporation. The IRS page “S corporations” describes S status as a corporation that passes income, losses, deductions, and credits through to shareholders for federal tax purposes. Shareholders report the flow-through on their own returns and are taxed at their individual rates. There are eligibility limits, including on who may own shares. This page does not restate the full eligibility list; use the IRS instructions for Form 2553.
Where self-employment tax enters the conversation
A sole proprietor generally pays self-employment tax on net earnings from the business. The self-employment tax estimate applies the Topic 554 regular method: net profit times 92.35%, then 12.4% Social Security up to the 2026 wage base and 2.9% Medicare, plus Additional Medicare tax when the thresholds apply. A partnership’s general partners have a related self-employment computation on their share. Confirm the partner rule in the Form 1065 instructions rather than assuming a draw is the tax base.
When corporate officers perform services and receive or are entitled to payments, the IRS treats those payments as wages. The fact that an officer is also a shareholder does not change that. If a shareholder received or had the right to receive cash or property, the IRS says the S corporation must determine and report an appropriate and reasonable salary. Courts have treated distributions as wages when compensation was not reported. This site will not suggest a salary, a percentage of profit, or a “safe” number. The IRS page does not publish a universal percent.
Qualified business income is a separate limit
The IRS describes the qualified business income deduction as allowing eligible taxpayers to deduct up to 20% of qualified business income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. Wages you earn as an employee are not qualified business income. The deduction has taxable-income and, in some cases, wage and property limits. It is not automatic, and it is not a reason by itself to elect S status. The IRS qualified business income deduction page is the overview. This site does not publish phaseout dollar amounts for that deduction because the figure has to be read from the form instructions for the year you are filing, not guessed.
What the books look like either way
An LLC taxed as a sole prop still uses owner’s equity and draws. An LLC taxed as an S corp runs payroll for the owner’s wages and records distributions to equity. The legal name on the bank account can be the LLC in both cases. The accounts behind the bank account are what change. A chart of accounts copied from a sole prop will misstate an S corp the first time someone codes a distribution as contract labor.
Questions people ask
Does forming an LLC cut self-employment tax?
Not by itself. A single-member LLC that is disregarded for federal tax is still reported like a sole proprietorship. Self-employment tax follows the tax classification, not the letters in the state name.
Can an LLC elect to be an S corporation?
An eligible LLC can elect corporate taxation and S status. Form 2553 is the election. Eligibility, timing, and owner restrictions are in the IRS instructions. This page is not that election.
What does the IRS say about S corp wages?
If a shareholder received or had the right to receive cash or property, the S corporation must determine and report an appropriate and reasonable salary for that shareholder. The IRS does not publish a single percentage that makes compensation reasonable.
Sources
- IRS: S corporations — pass-through taxation and a pointer to Form 2553.
- IRS: S corporation employees, shareholders, and corporate officers — reasonable compensation before distributions.
- IRS: Qualified business income deduction — up to 20% of QBI for eligible pass-through income, with limits.
- IRS Topic 554 — self-employment tax, for the sole-prop side of the comparison.