How LLCs and S-Corps Are Actually Taxed (2026): Real Numbers at Every Income Tier

LLC default and LLC-taxed-as-S-Corp are the same business with two different federal tax rules. Here is the complete breakdown with worked examples at $50k, $100k, $200k, $350k, $500k, and $1M.

How LLC Default Is Taxed

A single-member LLC is taxed as a disregarded entity by default. All net profit flows to Schedule C on the owner's personal 1040. That profit is subject to self-employment tax via Schedule SE, regardless of how much the owner actually takes out as distributions.

Self-employment tax rate (2026): 15.3% (12.4% Social Security + 2.9% Medicare) on the first $175,800 of net SE income, then 2.9% Medicare-only above that. Net SE income is calculated as net profit multiplied by 0.9235 (which accounts for the employer-equivalent deduction of half the SE tax).

You can deduct 50% of SE tax as an above-the-line deduction on Schedule 1. This reduces AGI and therefore federal income tax, partially offsetting the SE tax cost.

Multi-member LLCs file Form 1065 (partnership return) and each member receives a K-1. SE tax applies to each member's guaranteed payments and distributive share of ordinary income from trade or business activities.

How LLC-as-S-Corp Is Taxed

After filing Form 2553, the LLC is treated as an S-Corp for federal tax purposes. It files Form 1120-S annually and issues K-1s to each member. The owner receives two types of payments from the business: a W-2 salary and K-1 distributions.

W-2 salary: Subject to FICA at 15.3% total (7.65% employer share + 7.65% employee share). The employer portion is deducted as a business expense, reducing the S-Corp's taxable net income.

K-1 distributions: Not subject to payroll tax or SE tax. Taxed only as ordinary income on the owner's personal 1040 via Schedule E. This is the entire source of S-Corp tax savings.

The owner still pays quarterly estimated taxes on both the salary (via W-2 withholding) and the K-1 distribution (via Form 1040-ES). The S-Corp itself does not pay federal income tax as it is a pass-through entity.

The QBI 199A Interaction

The IRC Section 199A qualified business income deduction allows eligible owners to deduct 20% of QBI from taxable income. Both LLC default profit and S-Corp K-1 distributions qualify. But S-Corp W-2 salary does NOT qualify as QBI.

This means an S-election can reduce your QBI deduction. Example: $200,000 net profit. As LLC default, $200,000 is QBI-eligible, giving up to a $40,000 deduction. As S-Corp with $100,000 salary and $100,000 distribution, only $100,000 is QBI-eligible, giving up to a $20,000 deduction. At a 24% marginal rate, that $20,000 lost deduction costs an additional $4,800 in federal income tax, partially offsetting the SE tax savings.

SSTB phase-out: Service businesses (health, law, accounting, consulting, financial services) phase out the QBI deduction above $191,950 single / $383,900 MFJ in 2026. In the phase-out range, the S-election's effect on QBI can become the dominant factor in the decision.

Above the full phase-out ($241,950 single / $483,900 MFJ for SSTBs), neither structure gets the QBI deduction for the service income and the comparison simplifies back to SE tax vs FICA on the wage.

The SS Wage Base Cap on Savings

SE tax is 15.3% only up to the 2026 SS wage base of $175,800. Above that, only 2.9% Medicare applies. This caps the maximum SE tax savings from an S-election: once your salary plus total SE income exceeds $175,800, additional distributions only save 2.9% Medicare, less than $870 per additional $30,000 of distribution above the cap.

For earners with net profit above $400,000-$500,000, the marginal benefit of the S-election on income above the wage base is relatively small. The election still makes sense for the savings below the base, but the break-even calculation changes at high income levels.

Worked Examples at Every Income Level (2026)

Assumptions: single filer, Texas (no state income tax), 50% salary split, $2,400 compliance cost. SE tax savings column is gross savings before compliance cost subtraction.

Simplified illustration. Net benefit column deducts $2,400 compliance cost from SE tax savings. Does not model QBI deduction differences or state taxes. Use the full calculator for your specific inputs.

NIIT and Additional Medicare Tax

The 3.8% Net Investment Income Tax (NIIT) applies to passive income for high earners above $200,000 single / $250,000 MFJ. For S-Corp owners who materially participate in the business, K-1 income is generally not NIIT-exposed. Passive shareholders who do not materially participate may have K-1 distributions subject to NIIT.

The 0.9% Additional Medicare Tax applies to wages and SE income above $200,000 single / $250,000 MFJ. This applies to W-2 salary under S-Corp status, and also to SE income under LLC default. The 0.9% is not employer-matched.

State Income Tax Stacking

Federal SE tax is only part of the tax picture. State income tax applies to the full net profit under both structures in most states. The states that change the answer most dramatically are California ($800 minimum + 1.5% entity-level S-Corp tax), New York (fixed dollar minimum tax + MTA surcharge), and Tennessee (franchise and excise tax on S-Corps regardless of federal election).

Run the calculator with your state selected to see the state-adjusted verdict. Or see the full 50-state table.

Why Some CPAs Overstate S-Corp Savings

The commonly cited figure is "S-Corp saves 15% on all profits above your salary." That overstates it by ignoring: (1) the compliance cost you add, (2) the QBI deduction loss on the salary portion, (3) state-specific entity taxes, and (4) the SS wage base cap that reduces marginal savings above $175,800.

Net of compliance cost at $80,000 net profit in California, the actual S-Corp benefit may be negative. At $80,000 in Texas, it is marginally positive. At $200,000 in most states, it is clearly positive. The number depends on the inputs, not on the rule of thumb.