LLC vs S Corp Tax Differences Explained

Key tax differences between LLCs and S Corps: Self-Employment Tax: LLC: All business income subject to SE tax (15.3%) on net earnings. S Corp: Only W-2 wages subject to payroll taxes; distributions are not subject to SE tax. Payroll Requirements: LLC: No payroll requirements; owners take draws and pay estimated taxes. S Corp: Owner-employees must receive reasonable compensation via W-2 payroll. Tax Forms: LLC: Form 1065 (multi-member) or Schedule C (single-member). S Corp: Form 1120S with K-1s to shareholders. Income Distribution: LLC: Flexible profit/loss allocation regardless of ownership percentage. S Corp: Pro-rata distribution based on share ownership only. Losses: LLC: Losses pass through based on ownership/allocation. S Corp: Losses limited to stock basis plus loan basis. State Tax Considerations: Some states don't recognize S election and tax as C Corp. LLCs may have state-level taxes (e.g., California $800 minimum). Optimal Choice: S Corp often better for higher-income businesses due to SE tax savings. LLC better for losses, flexible allocations, or multiple owner types.