S corp vs. LLC (Schedule C): the tax differences that actually matter
"LLC or S-corp?" is the wrong question — your LLC doesn't stop being an LLC when it elects S-corp status; it just gets taxed differently. The real decision is between paying self-employment tax on 100% of your profit, or splitting it into a salary and a distribution. One real business owner tried to make that split by paying himself nothing at all. It didn't end well.
Search "LLC vs S-corp" and you'll find thousands of articles treating them as two competing types of business. They aren't competitors — they're not even the same kind of thing. An LLC is a state-law entity. An S corporation is a federal tax election (Form 2553) that any eligible LLC or corporation can make. Your single-member LLC can, right now, elect to be taxed as an S-corp without changing its name, its state registration, or anything else about how it legally exists.
So the real comparison isn't "LLC vs. S-corp." It's the LLC's default tax treatment — reporting profit on Schedule C of your personal Form 1040 as a disregarded entity — against what happens once that same LLC elects S-corp status. And the difference that actually moves money is, again, self-employment tax.
Four things that actually change when you elect S-corp status
Click through the tabs below for how each piece works.
Schedule C / default LLC
Net profit from Schedule C flows to Schedule SE, where IRC §1401 and §1402(a) impose self-employment tax on 92.35% of that profit — the full 15.3% combined rate (12.4% Social Security, up to the wage base, plus 2.9% uncapped Medicare) applies no matter how the money is used, spent, or reinvested in the business.
S corporation
Since Rev. Rul. 59-221 (1959), only a shareholder-employee's reasonable compensation — paid as an actual W-2 salary — is subject to FICA. Profit distributed above that salary under §1368 carries no Social Security or Medicare tax at all. This is the entire mechanical reason people elect S-corp status; everything else is a side effect of that one rule.
Staying Schedule C
Nothing to file. A single-member LLC is automatically a disregarded entity under the "check-the-box" regulations (Treas. Reg. §301.7701-3) unless you elect otherwise — you simply attach Schedule C (and Schedule SE) to your Form 1040 every year.
Electing S-corp status
Here's the part most owners over-complicate: an eligible LLC does not need to file Form 8832 first. Under Treas. Reg. §301.7701-3(c)(1)(v)(C), timely filing Form 2553 alone is treated as simultaneously electing corporate classification and S-corp status, provided the LLC otherwise qualifies under §1361(b) (a single-member LLC, having exactly one owner, automatically clears the 100-shareholder and one-class-of-stock tests). File it within 2 months and 15 days of the tax year you want it to apply to, or anytime the year before. Miss the deadline and Rev. Proc. 2013-30 allows late-election relief for up to 3 years and 75 days, given reasonable cause.
Schedule C / default LLC
You deduct self-employed health insurance directly under §162(l) on your personal return. For a solo 401(k), your own employer-side (profit-sharing) contribution is capped by a reduced, self-referential rate: a 25%-of-compensation plan effectively caps out at about 20% of your net self-employment earnings (net profit minus the deductible half of SE tax), because the contribution itself reduces the base it's calculated from.
S corporation
Health insurance the company pays for you (a 2%+ shareholder) must be added to Box 1 of your W-2 under §1372 and IRS Notice 2008-1 — but it's exempt from FICA if the requirements are met, and you then claim the personal deduction anyway. For retirement, the employer contribution is a straightforward 25% of actual W-2 wages, with no circular reduction — meaning a higher salary directly buys more retirement-contribution room, up to the overall §415(c) annual-additions limit ($72,000 for 2026, before catch-up).
Schedule C / default LLC
Under Treas. Reg. §1.199A-3(b)(1)(vi), the deductible portion of your self-employment tax, your self-employed health insurance deduction, and your retirement plan contributions all reduce your qualified business income (QBI) before the 20% deduction is calculated — on top of already having $0 in W-2 wages to support the deduction if your income lands above the phase-in range.
S corporation
Reasonable compensation is excluded from QBI too (it's never treated as qualified business income for the owner who earns it) — but it does count as W-2 wages for the wage-limitation test that applies once taxable income exceeds the phase-in range ($201,750 single / $403,500 married filing jointly for 2026). For a high-earning solo owner with no other employees, that's often the only way to have any W-2 wages to point to — which can be the difference between a full QBI deduction and a severely limited one.
Run your own numbers
The payroll-tax gap depends entirely on your profit level and the salary you'd actually be able to defend. Enter your figures below.
Schedule C / default LLC
S corporation
Side by side: the full comparison
| Schedule C / default LLC | S corporation | |
|---|---|---|
| Legal entity | LLC (unchanged either way) | Same LLC — just a different tax election |
| Entity-level income tax | None (disregarded) | None (pass-through) |
| SE tax / FICA on profit | 100% of net profit | Reasonable salary only |
| Forms to elect | None needed | Form 2553 only (no separate 8832) |
| Annual federal filing | Schedule C + SE with Form 1040 | Form 1120-S + K-1, plus payroll filings |
| Retirement employer contribution base | ~20% of net SE earnings (circular reduction) | 25% of actual W-2 wages |
| SE tax / health / retirement reduce QBI? | Yes, per §1.199A-3(b)(1)(vi) | No equivalent reduction at the shareholder level |
| W-2 wages for the §199A wage limit | $0 (no employees = no wage base) | Salary counts |
| Administrative overhead | Minimal | Payroll, corporate return, reasonable-comp risk |
The McAlary case: what happens when you pay yourself nothing at all
In Sean McAlary Ltd., Inc. v. Commissioner, T.C. Summary Opinion 2013-62, the taxpayer was a real estate agent who ran his business through an S-corp, working roughly 12-hour days with few days off, closing the deals himself, and holding every officer title in the company. His formally authorized salary was $24,000 — but it was never actually paid. Instead, the corporation distributed $240,000 to him against $231,454 of net income, with $0 run through payroll.
The IRS argued for $100,000 of reasonable compensation, built from a national wage survey and California labor-statistics data showing a median real estate broker wage of $48.44/hour. The Tax Court rejected that figure as too generous, instead applying a "totality of the facts and circumstances" test — the same multi-factor approach used in every reasonable-compensation case — and landed on $40/hour for a 2,080-hour year, or $83,200. That amount was retroactively treated as wages subject to FICA, on top of the tax already paid on the distributions as ordinary income.
The lesson isn't the dollar figure — it's that "I never paid myself a salary" is not a defense. If you did the work of an employee, the IRS and the courts will construct a salary for you, often less favorably than if you'd set one yourself in the first place.
What the IRS actually looks at for "reasonable" compensation
There's no statutory formula. The IRS's own published factors include: training and experience; duties and responsibilities; time and effort devoted to the business; dividend history; what the company pays non-shareholder employees; the timing and manner of bonuses to key people; what comparable businesses pay for similar work; any compensation agreement in place; and whether a consistent formula is used year to year. In David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012), a CPA who paid himself just $24,000 while his firm generated over $2 million in revenue was found to owe FICA on roughly $91,044 of what he'd taken as distributions instead.
The pattern in every losing case is the same: a token or zero salary paired with large, regular distributions, for work that clearly required the owner's own labor. There's no safe percentage of profit that guarantees compliance — the test looks at the actual job, not a ratio.