S Corp vs LLC Tax Filing: What’s the Difference and Why It Matters

If you’re a small business owner, chances are you’ve come across the term “S Corp” at some point—maybe even considered making the switch. But what exactly does it mean to file taxes as an S Corporation, and how is that different from running a traditional LLC or an LLC taxed as an S Corp? Let’s break it down.

The Basics: LLC vs. S Corp

An LLC (Limited Liability Company) is a business structure that provides liability protection and flexible tax treatment. By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC is taxed as a partnership. In both cases, profits pass through to the owners’ personal tax returns.

An S Corporation isn’t a business entity type—it’s a tax election. Both corporations and LLCs can elect to be taxed as an S Corp by filing IRS Form 2553. This election changes how the IRS treats your business income and can have a big impact on how much you pay in self-employment taxes.

Key Differences in Tax Treatment

Here’s where things start to diverge:

Feature	LLC (default)	LLC taxed as S Corp
Self-Employment Taxes	Owners pay self-employment tax (15.3%) on all profits	Owners only pay self-employment tax on salary; distributions are not subject to it
Payroll Requirement	Not required	Required—owners must be paid a "reasonable salary"
Tax Forms	Schedule C (Form 1040)	Form 1120-S + Schedule K-1 + W-2s
Owner Distributions	Treated as self-employment income	Split between salary (taxed) and distributions (not taxed for SE tax)
Complexity	Simple	More admin involved (payroll, bookkeeping, compliance)

Why Elect S Corp Status?

The main reason? Tax savings. With a standard LLC, all profits are subject to self-employment tax. But with an S Corp election, only your salary is subject to those taxes. The rest can be taken as distributions, which avoids the 15.3% SE tax.

For example, if your LLC earns $100,000 in profit:

• As a default LLC, you’d pay self-employment tax on the full $100,000.

• As an S Corp, you might pay yourself a $60,000 salary (taxed) and take the other $40,000 as a distribution (not subject to SE tax).

  
  

Depending on your income and expenses, that can add up to thousands in savings.

Things to Watch Out For

• Reasonable Compensation: The IRS requires that S Corp owners pay themselves a fair salary before taking distributions.

• Increased Complexity: Running payroll, filing quarterly tax reports, and issuing W-2s adds administrative work or costs.

• Potential State Taxes: Some states (like California) impose franchise taxes or minimum fees on S Corps.

  
  

So, Which Should You Choose?

If your business is earning solid profits (generally over $40–50K), the S Corp election can provide significant tax benefits. But it comes with added complexity, so you’ll want to consult with a tax professional to see if it’s worth it for your situation.