Taxes
S-corp vs LLC: what the choice changes
Most "S-corp vs LLC" questions mix up two different things. An LLC is a legal structure you set up with your state. An S-corp is a tax election you make on top of a business you already have. You can run an LLC that is taxed as an S-corp. So the decision that moves your taxes is whether to elect S-corp treatment. The entity label matters less than the election you put on it, and the election mostly comes down to two things: how your profit splits between a salary and a distribution, and how much profit you have to split.
This page explains how that works in plain terms. It does not set your salary or file your election. Those belong to you and your CPA. When you want the number on your own 2026 figures, the calculator runs it.
No fee and no contact for the first result.
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An LLC and an S-corp are different things
An LLC is a legal entity. It gives you liability protection and a business identity at the state level. By default, a single-owner LLC is taxed as a sole proprietorship: the business itself pays no separate income tax, and all of its profit flows to your personal return.
An S-corp is a federal tax status. You do not form one from scratch; you elect it for a business you already run, whether that business is an LLC or a corporation. After the election, the same company is simply taxed under different rules.
So the real fork is the tax election.
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How a default LLC is taxed
With a default single-owner LLC, the math is simple. Your net profit, what is left after expenses, passes through to your personal return. You owe regular income tax on it, and you also owe self-employment tax on the full amount, because to the tax system you are self-employed on all of it.
One return, no payroll to run, very little extra paperwork. For a newer or lower-profit business, that simplicity is often worth more than any election.
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What changes when you elect S-corp treatment
When you elect S-corp treatment, you become an employee of your own company. Your profit now arrives in two parts:
- A salary you pay yourself, reported on a W-2. This is wage income, and payroll taxes apply to it the way they would for any employee.
- A distribution, the profit left after your salary. This part is not wage income, so self-employment and payroll taxes do not apply to it.
That split is where the potential saving comes from: you move some profit out of the wage column, where payroll tax applies, and into the distribution column, where it does not. The trade is that you now run real payroll, file a separate business return, and carry more bookkeeping and cost than a default LLC. The election only helps when the saving on the distribution is larger than that added cost.
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LLC vs S-corp at a glance
| Default LLC | S-corp election | |
|---|---|---|
| How profit is taxed | All net profit, with self-employment tax on the full amount | Split into a W-2 salary, with payroll tax, and a distribution, with no self-employment or payroll tax |
| Payroll to run | No | Yes |
| Separate business return | No | Yes |
| Bookkeeping and cost | Lower | Higher |
| Tends to fit | Newer or lower-profit businesses, and owners who want simplicity | Steady, higher-profit businesses where the saving beats the added cost |
The table shows the shape of the choice. Your own break-even depends on your figures, which is what the calculator works out.
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The reasonable-salary rule, which is the whole catch
You cannot pay yourself a token salary and call the rest a distribution. The salary has to be reasonable for the work you actually do. A salary set artificially low, purely to shrink the wage column, is one of the clearest audit flags there is.
What counts as reasonable depends on your role, your hours, your industry, and what similar work pays in your area. There is no fixed percentage and no safe formula. This is the single most judgment-heavy part of the decision, and it is exactly where a CPA earns their fee. We do not set your salary. Your CPA does, and the calculator uses a figure you and your CPA can stand behind.
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When the election tends to pay off
The election tends to make sense once your profit is high enough that the payroll-tax saving on the distribution clearly beats the cost of running payroll and filing a second return. Below that level, the default LLC is usually simpler and cheaper, and the election can even cost you more than it saves.
There is no universal threshold, because the answer moves with your profit, your reasonable salary, and your state. That is the point of running real numbers instead of a rule of thumb. The calculator computes it on your 2026 figures and shows you the difference; your CPA confirms it before you act.
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Why this matters for your coverage
The tax election quietly changes something else. Electing S-corp treatment puts you on a W-2 wage from your own company, and that W-2 status, through the right structure, can open a door a sole proprietor is usually shut out of.
A sole proprietor is told to shop the individual market for coverage and to handle retirement alone. An owner on a W-2 wage can instead join a real group health plan, the kind a large employer offers, and pair it with a retirement plan. How the coverage itself is treated for an owner is a CPA question, which is exactly why the calculator shows your tax picture and your coverage picture together, two ways, on your own numbers, for your CPA to check.
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How we calculate this, and our sources
The calculator applies 2026 federal and state tax rules to the figures you enter, and the full report shows every line so your CPA can check it. We do not guess at your salary or your profit; we model the numbers you and your CPA confirm.
The mechanics described here, self-employment tax on a default LLC, payroll tax on S-corp wages, and the reasonable-compensation expectation, come from current IRS guidance for S-corporation owners (IRS, 2026). Tax thresholds and brackets adjust every year, so this page reflects 2026 rules and is reviewed quarterly.
2026 note: this page was reviewed for the 2026 tax year in June 2026. If you are reading it for a later year, confirm the current figures with your CPA. See our full method.
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Frequently asked questions
Can an LLC be taxed as an S-corp?
Yes. The S-corp election is a tax status you place on an existing business, and a single-owner or multi-owner LLC can elect it. The company stays an LLC at the state level and is taxed under S-corp rules federally.
What is a reasonable salary?
The wage you would have to pay someone else to do the work you do in the business, given your role, hours, industry, and market. There is no fixed percentage. Setting it too low to avoid payroll tax is an audit risk, so this is a decision to make with your CPA.
At what profit does an S-corp make sense?
There is no single number. It depends on your profit, the salary you can justify, and your state, because the election only helps once the saving on the distribution beats the added cost of payroll and a separate return. The calculator runs it on your figures so you can see your own break-even.
Does USA OPS give tax advice?
No. We run the math on your 2026 numbers and build a report your CPA can check. We are not your CPA or your attorney, and the final call on your salary, your election, and your filings stays with you and your advisors.
What does any of this have to do with health coverage?
Paying yourself a W-2 wage as an S-corp owner can open access to a real group health plan and a retirement plan that a sole proprietor does not get. How that coverage is taxed for an owner is a CPA question, and the calculator shows your tax and coverage picture together.
See your number