LLC vs S Corp: Which Business Structure Wins in 2026?

The 60-second rule

If you net under ~$60,000, stay an LLC. The $1,000–$2,500 of extra payroll and tax-prep costs an S corp demands eat the payroll-tax savings whole — at $40,000 of net with a $30,000 salary, the LLC wins by $938 a year. If you net $80,000+ and can justify a salary well below your earnings, elect the S corp — at $100k of net with a $60k salary it keeps $2,950 a year. Between $60k and $80k, run the numbers — the salary you choose decides the fight, and the break-even at the defaults is a $79,278 salary. One number, checked once, decides the whole fight.

How each side really works

Start with the LLC, because it’s the default most freelancers already live in. An LLC taxed as a sole proprietorship (or disregarded entity) pays self-employment tax: 15.3% — 12.4% Social Security on the first $184,500 of earnings (the 2026 wage base, set by the Social Security Administration) plus 2.9% Medicare on everything — applied to 92.35% of net earnings. That 92.35% is the IRS’s built-in adjustment: it makes the self-employed person’s bill roughly equal to what an employee plus employer pay together in FICA. On $100,000 of net: 92.35% is $92,350; 12.4% of that is $11,451.40; 2.9% is $2,678.15; total $14,129.55. Half of it is deductible above the line on your 1040, which softens the income-tax side — but the $14,130 itself is the bill you can’t deduct your way out of.

The S corporation keeps the same tax code but changes what it applies to. The owner becomes a W-2 employee of their own company and takes a salary; that salary pays the same 15.3% FICA. Everything above the salary flows through as distributions that pay zero payroll tax. On the same $100,000 with a $60,000 salary: $60,000 × 15.3% = $9,180 in payroll tax, and the remaining $40,000 of profit passes through untouched by payroll tax. The gap between $14,130 and $9,180 — $4,950 — is the entire prize the S corp is chasing. But collecting it costs money: a payroll service ($600–$1,800/yr to run payroll and file quarterly 941s), extra tax prep for the 1120-S return and K-1s ($800–$2,000/yr), and sometimes state fees. Call it $2,000 a year mid-range, and the $4,950 prize shrinks to $2,950. That subtraction — the admin bill — is where most S-corp dreams quietly die.

The $2,950 worked example, line by line

• The LLC side: $100,000 net × 92.35% = $92,350 taxable for SE purposes. 12.4% Social Security = $11,451.40 (the full amount is under the $184,500 wage base). 2.9% Medicare = $2,678.15. No Additional Medicare tax (under $200k). Total: $14,129.55.
• The S-corp side: $60,000 salary × 15.3% = $9,180 payroll tax. Plus $2,000 admin = $11,180. The $40,000 of distributions above the salary: $0 payroll tax.
• The verdict: $14,129.55 − $11,180 = $2,949.55 — the S corp keeps $2,950 a year, every year, as long as the income, salary, and admin bill hold.
• The sensitivity: raise the salary to $70,000 → S corp still wins, by $1,420. Raise it to $85,000 → the LLC wins by $875 (the salary ate the gap). Drop admin to $0 (DIY payroll) → S corp wins $4,950. Raise admin to $5,000 → a $50 near-tie.
• The break-even: at $100k of net and $2k admin, the salary that exactly zeroes the savings is $79,278. Below it, the S corp wins; above it, the LLC keeps the crown.

When the LLC wins anyway

The S corp is not a universal upgrade — three situations hand the crown back to the LLC. First, low income. At $40,000 of net with a $30,000 salary, the payroll-tax gap is only about $1,062, and the $2,000 admin bill turns that into a $938-a-year loss. Below roughly $60,000 of net, the LLC’s zero paperwork is the feature, not a compromise. Second, a high salary. The IRS requires a "reasonable salary" (more on that below), and the more of your profit the salary consumes, the less payroll tax there is to dodge — at an $85,000 salary on $100k of net, the LLC wins by $875. Third, admin bloat. A $5,000-a-year payroll-and-prep bill turns the defaults into a $50 near-tie: you’ve bought yourself quarterly filings and gained nothing. The calculator’s admin slider is the most honest input on the page — move it and watch wins evaporate.

The reasonable-salary trap

Here’s the rule that makes the S corp’s math dangerous in inexperienced hands: the IRS requires an owner who works in the business to take "reasonable compensation" before distributions. "Reasonable" is facts-and-circumstances — what the market pays for the role, your hours, the company’s profit — not a formula. The folk "60/40 rule" (60% salary, 40% distributions) is a rule of thumb, not law. The audit risk runs one direction: too-low salaries. A $100,000 profit with a $20,000 salary is the profile that draws IRS attention, and reclassification means back payroll taxes plus penalties. The practical move: document the salary decision (comparable job postings, an hour log, a short memo) the year you make it, not the year you’re asked. This calculator will show you the math on any salary — including the aggressive ones — but the math is not permission.

The hidden costs nobody quotes

The S-corp pitch usually prices the win and forgets the bill. The real annual overhead: a payroll service ($600–$1,800/yr — you must run real payroll and file quarterly 941s; "paying yourself whenever" is not payroll), added tax prep for the 1120-S corporate return and your K-1 ($800–$2,000/yr over a Schedule C), and in some states franchise taxes or minimum fees that apply to S corps but not to sole proprietorships. There’s also a time tax: payroll deadlines, separate bookkeeping, and an extra tax return every spring. None of this kills the S corp at $100k+ of net — $2,950 of annual savings buys a lot of paperwork tolerance — but at $60k of net it’s the difference between winning and losing. Price the admin honestly in the calculator; it’s the input most people lowball.

The QBI question (it rarely decides the race)

The 20% qualified business income deduction is generally available to both structures, so it shrinks both income-tax bills equally and doesn’t move the payroll-tax gap this comparison prices. The one wrinkle: the deduction is computed on QBI, and S-corp W-2 wages reduce QBI — at high incomes near the phaseouts, that can tilt slightly toward the LLC. If you’re near the QBI income limits, model both with a CPA. For everyone else, the payroll-tax gap is the whole decision, and this page prices exactly that.

Three questions to ask before you elect

• 1. "What’s my realistic net for the next 2–3 years — and is it over $60k?" The election pays off on sustained income, not one good quarter. Under $60k of net, the admin bill usually wins; over $80k, the S corp usually wins. In between, run the comparison with your exact numbers.
• 2. "What salary can I defend?" Price the S corp at the salary you’d actually take — documented, market-based — not the fantasy $20k. Then check the break-even: at the defaults, anything under $79,278 still wins. If your defensible salary is above the break-even, the LLC wins and the conversation is over.
• 3. "What’s my true admin bill?" Get a real payroll-service quote and ask your preparer what the 1120-S adds. If the honest total is $2,500 instead of the $2,000 default, the win shrinks by $500 a year — and at lower incomes that’s the whole margin.

Three mistakes

• Mistake 1: Electing on a spike. One $120k year doesn’t make an S corp — the election, the payroll setup, and the extra return are annual commitments. Elect on the run rate, and remember you can elect mid-stream when the income actually arrives.
• Mistake 2: The $1 salary. Taking a token salary to maximize distributions is the fastest route to reclassification, back taxes, and penalties. The IRS has seen this movie. Price the S corp at a salary you can defend in writing.
• Mistake 3: Forgetting distributions still owe income tax. The S corp dodges payroll tax on distributions, not income tax — every dollar still hits your 1040 at your marginal rate. Anyone promising "tax-free distributions" is selling something.

Run your own numbers — your net, your salary, your admin bill — in the LLC vs S corp comparison.