Pays Less Taxes LLC, S corp or C corp: the setup that lowers your tax

A sole proprietorship, or an LLC with one owner, reports the profit on Schedule C of the owner's Form 1040. The owner pays income tax on the profit, plus self-employment tax of 15.3% on 92.35% of it. The Social Security part of that stops at $184,500 of earnings for 2026.

When two or more people own the business, as a partnership or a multi-member LLC, it files its own return on Form 1065 and sends each owner a K-1 showing their share. Each owner pays tax on that share on their own return, and active owners usually owe self-employment tax on it too.

An S corporation files Form 1120-S. The owner who works in the business takes a salary through payroll, and payroll tax applies to that salary. The rest of the profit passes to the owners on a K-1, and distributions of it carry no Social Security or Medicare tax.

A C corporation files Form 1120 and pays a flat 21% federal tax on its own profit. When it pays dividends, the owners pay tax on them again. Owners who keep most of the profit in the business to grow it sometimes come out ahead this way.

Most owners land in one of these four.

• Sole owner or single-member LLC: a new business, or a profit small enough that the cost of payroll and a second return would eat the saving.
• S corp: steady profit well above what a fair salary for your work would be. This is the most common move for owners who want to pay less self-employment tax.
• Partnership: two or more owners who want to split profit in a way that doesn't follow ownership exactly.
• C corp: profit you plan to leave in the business, outside investors, or a plan to sell the company someday.

An LLC is a legal form you set up with your state. The tax choice is a separate step with the IRS. Unless it elects otherwise, the IRS treats a single-owner LLC as a sole proprietorship and an LLC with several owners as a partnership.

An LLC can choose to be taxed as an S corp by filing Form 2553. You keep the same company, the same bank account and the same name. Only the federal tax treatment of the profit changes.

Here's a made-up owner with $90,000 of profit. As a sole owner, the self-employment tax is about $12,720.

As an S corp paying a $50,000 salary, the payroll tax on the salary is $7,650. That's about $5,070 less, before the cost of a payroll service and the S corp's own tax return.

At this profit the saving is real but smaller, and the costs matter more. At $140,000 of profit and a $70,000 salary, the same math saves about $9,070. On the call, we plug in your own profit and salary instead.

The election is one form, but a few things have to be true first.

• Check that you qualify: no more than 100 shareholders, one class of stock, and only allowed owners, such as individuals who are U.S. citizens or residents, and certain trusts and estates.
• Send Form 2553 to the IRS within 2 months and 15 days of the first day of the year the election should start, or at any point in the prior year. For a calendar-year business that wants the election for 2027, that means by March 15, 2027, or any day in 2026.
• Get a signed consent from each person who owns shares.
• Keep the IRS acceptance letter. It confirms the election and the date it starts.
• Set up payroll and a fair salary, so the owner who works in the business is paid as an employee.
• File Form 1120-S each year. For a calendar-year S corp it's due March 15, with a six-month extension available.

Missed the deadline? Revenue Procedure 2013-30 gives a path for a late election, usually if you ask within 3 years and 75 days of the start date you wanted. We check whether you fit before you file.

Does forming an LLC lower my taxes? On its own, an LLC is taxed like a sole proprietorship or a partnership. The saving comes when the LLC also elects S corp status and pays a fair salary.

Can I switch back later? Yes, you can revoke an S election. After a revocation, you generally have to wait five years to elect again, so it's worth getting the numbers right first.

Which setup do I have now? Your last return shows it. A Schedule C means a sole proprietorship. A Form 1065 means a partnership. A Form 1120-S means an S corp.