S Corp vs LLC: Which One a Freelancer Needs

At FreelanceAtlas, we help freelancers choose a business setup from real numbers. This guide explains what each label means, the three ways an LLC can be taxed, who is allowed to elect S corp status, and the federal tax at two profit levels, worked step by step. If you have not decided whether to form an LLC at all, start with Sole Proprietor vs LLC for Freelancers: Which Business Structure Do You Actually Need?, and for the salary rules and retirement trade-offs in more depth, read S Corp for Freelancers: When the Tax Savings Are Real.

This article is general information, not tax or legal advice. The examples use 2026 federal figures for a single filer with simplified assumptions, and your state, your salary and your costs change the result. Confirm your numbers with a CPA or enrolled agent, and your LLC setup with an attorney in your state, before you file anything.

S Corp vs LLC: A Legal Structure Compared With a Tax Election

The IRS describes the two in different terms. Its limited liability company page says “A Limited Liability Company (LLC) is a business structure allowed by state statute.” Its S corporations page describes corporations that “elect to pass corporate income” and their other tax items “through to their shareholders for federal tax purposes.” The first is created by a filing with your state. The second is a status the IRS grants to a business that qualifies and asks for it.

The US Small Business Administration’s guide to choosing a business structure says the same: “Designations like S corp and nonprofit aren’t strictly business structures,” and “It’s possible for an LLC to be taxed as a C corp, S corp, or a nonprofit.” The guide also notes that S corps “must file with the IRS to get S corp status, a different process from registering with their state.”

What the LLC Gives You

An LLC is mainly about liability. The SBA says “LLCs protect you from personal liability in most instances,” so a claim against the business generally stays with the business. That protection depends on running the LLC as a separate business with its own account and records, which Business Bank Account for Freelancers: When You Need One and How to Open It covers. Forming one costs a state filing fee, and all seven states compared in Best State to Form an LLC for Freelancers: Why Home Usually Wins also charge a recurring fee or tax to keep an LLC active.

What the S Corp Election Changes

The election changes federal tax treatment, and state tax where the state follows the federal rules. Liability protection still comes from the LLC underneath. Without the election, a one-owner LLC pays self-employment tax on all of its profit. With it, you become an employee of your own company, pay yourself a salary through payroll, and take the rest of the profit as distributions that carry no Social Security or Medicare tax. The IRS S corporations page adds that shareholders “are assessed tax at their individual income tax rates,” which “allows S corporations to avoid double taxation on the corporate income.”

How an LLC Is Taxed If You Make No Election

An LLC’s default tax treatment depends on how many owners it has. The IRS LLC page says “a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation,” and that “an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation.”

For a solo freelancer, disregarded means the IRS taxes the LLC like a sole proprietorship. Profit goes on Schedule C, which Schedule C Instructions for Freelancers: A Line-by-Line Guide for 2026 walks through line by line. IRS Topic 554 confirms that the term sole proprietor “also includes the member of a single member LLC that’s disregarded for federal income tax purposes.” You owe self-employment tax on 92.35 percent of net earnings, at a rate made up of “12.4% for Social Security and 2.9% for Medicare taxes.” The Social Security part stops at the 2026 wage base of $184,500 listed in IRS Topic 751, and Self-Employment Tax Explained: Where That 15.3% Actually Goes covers the full calculation.

The Three Ways an LLC Can Be Taxed: Default, C Corp or S Corp

An LLC with one owner has three federal tax options. This is the comparison behind searches for LLC vs C corp vs S corp:

Where the rows come from:

• S corp without Form 8832. The Instructions for Form 2553 say an eligible entity that elects S status “will be treated as a corporation as of the effective date of the S corporation election and doesn’t need to file Form 8832.”
• The 21 percent rate. The Instructions for Form 1120 tell a C corporation to “Multiply taxable income (page 1, line 30) by 21% (0.21).”
• Double tax. The IRS page on forming a corporation says “The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax.”
• QBI. The Instructions for Form 8995 allow the qualified business income (QBI) deduction on income “from a pass-through entity, but not from a C corporation,” and exclude “Amounts received as reasonable compensation from an S corporation.”

The C corp option rarely fits a one-person service business, because profit you pay out is taxed twice and the QBI deduction is lost. That leaves most freelancers comparing the first and third columns, which is what people usually mean by S corp vs LLC.

Who Can Elect S Corp Status, and by When

Not every LLC qualifies. The IRS S corporations page lists the requirements:

• Domestic. The business must be a domestic corporation or a US entity, such as an LLC, that is eligible to be treated as one.
• Allowed owners. Shareholders “May be individuals, certain trusts, and estates” and “May not be partnerships, corporations or non-resident alien shareholders.”
• Size. No more than 100 shareholders.
• One class of stock. The Form 2553 instructions say a corporation generally meets this test “if all outstanding shares of the corporation’s stock confer identical rights to distribution and liquidation proceeds.”

The owner rule matters for freelancers outside the United States. If you are neither a US citizen nor a US resident and you own a US LLC, that LLC cannot elect S corp status, because you would be a nonresident alien shareholder. Your federal options are the default treatment or a C corp election.

Timing comes from the Form 2553 instructions, which require filing “No more than 2 months and 15 days after the beginning of the tax year the election is to take effect” or “At any time during the tax year preceding the tax year it is to take effect.” For a calendar-year LLC that wants S status from January 1, 2027, that means any day in the rest of 2026 or by March 15, 2027. Someone authorized to sign for the business signs the form, and each shareholder consents by signing too. The instructions say the business “should generally receive a determination on its election within 60 days,” and acceptance arrives as a CP261 notice, which the IRS tells you to keep “in your permanent records.”

Worked Example: LLC vs S Corp at $70,000 and $200,000 of Profit

Both examples use the same inputs:

• A single filer in 2026 with one single-member LLC and no other income.
• Profit means revenue minus business expenses, before any salary to you.
• The 2026 standard deduction of $16,100 and the 2026 single rate table from Revenue Procedure 2025-32. Taxable income stays below the 2026 QBI threshold of $201,750 in every column, so the simple 20 percent QBI rules apply.
• For the S corp, a salary of $50,000 at $70,000 of profit and $100,000 at $200,000, plus $2,000 a year of extra running costs for a payroll service, unemployment taxes and the S corp tax return. The costs are an assumption, so replace them with real quotes.
• No retirement contributions, no health insurance deduction and no state tax. Amounts are rounded to whole dollars at each step.

At $70,000 of Profit, the Election Costs $488

The default LLC, step by step:

1. Self-employment tax. $70,000 x 92.35 percent = $64,645. Social Security is $64,645 x 12.4 percent = $8,016, and Medicare is $64,645 x 2.9 percent = $1,875, for $9,891.
2. Income before QBI. Half the self-employment tax, $4,946, is deductible, so adjusted gross income is $65,054. After the $16,100 standard deduction, $48,954 is left.
3. QBI deduction. Twenty percent of QBI ($65,054) is $13,011, but the deduction is capped at 20 percent of $48,954, which is $9,791.
4. Income tax. Taxable income is $39,163. The 2026 single table charges $1,240 plus 12 percent of the amount over $12,400, so $1,240 + $3,212 = $4,452.
5. Total. $9,891 + $4,452 = $14,343.

The same LLC taxed as an S corp:

1. Payroll tax. 15.3 percent of the $50,000 salary is $7,650: $3,825 paid by the company and $3,825 withheld from your pay, at the rates in Topic 751.
2. K-1 income. $70,000 – $50,000 salary – $3,825 employer tax – $2,000 running costs = $14,175, reported to you on Schedule K-1.
3. Income before QBI. $50,000 + $14,175 = $64,175, minus $16,100 = $48,075.
4. QBI deduction. Only the K-1 income counts, so 20 percent of $14,175 = $2,835.
5. Income tax. Taxable income is $45,240, and the tax is $1,240 + 12 percent of $32,840 = $5,181.
6. Total. $7,650 + $5,181 + $2,000 = $14,831, which is $488 more than the default LLC.

Payroll tax fell by $2,241, income tax rose by $729, and the costs took $2,000. With no running costs at all, the S corp would have come out $1,320 ahead, so at this profit the payroll service and tax return decide the result.

At $200,000 of Profit, the Election Saves $6,049

The default LLC:

1. Self-employment tax. $200,000 x 92.35 percent = $184,700. Social Security applies only up to $184,500, so it is $184,500 x 12.4 percent = $22,878. Medicare is $184,700 x 2.9 percent = $5,356. The total is $28,234. Topic 554 applies the Additional Medicare Tax only to self-employment income above $200,000 for a single filer, so none applies.
2. Income before QBI. $200,000 – $14,117 (half the self-employment tax) = $185,883, minus $16,100 = $169,783.
3. QBI deduction. Twenty percent of $185,883 is $37,177, capped at 20 percent of $169,783, which is $33,957.
4. Income tax. Taxable income is $135,826. The table charges $17,966 plus 24 percent of the amount over $105,700: $17,966 + $7,230 = $25,196.
5. Total. $28,234 + $25,196 = $53,430.

The S corp with a $100,000 salary:

1. Payroll tax. 15.3 percent of $100,000 is $15,300, split $7,650 and $7,650.
2. K-1 income. $200,000 – $100,000 – $7,650 – $2,000 = $90,350.
3. Income before QBI. $100,000 + $90,350 = $190,350, minus $16,100 = $174,250.
4. QBI deduction. 20 percent of $90,350 = $18,070.
5. Income tax. Taxable income is $156,180, and the tax is $17,966 + 24 percent of $50,480 = $30,081.
6. Total. $15,300 + $30,081 + $2,000 = $47,381, which is $6,049 less than the default LLC.

Here payroll tax fell by $12,934. Income tax rose by $4,885, mostly because the QBI deduction shrank by $15,887, and the costs took $2,000.

Your Salary Decides How Much the Election Saves

The $100,000 salary in the $200,000 example is an input, and the result moves with it. With profit held at $200,000 and costs at $2,000, the same steps give:

• $80,000 salary: the S corp saves $9,775.
• $100,000 salary: it saves $6,049.
• $120,000 salary: it saves $2,323.
• $140,000 salary: it costs $1,404 more than the default LLC.

Each extra $20,000 of salary cuts the saving by about $3,726. You cannot set the salary low just because a low salary saves the most. The IRS page on S corporation compensation says “S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee.” It also says “The IRS has the authority to reclassify payments made to shareholders from non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes).”

For a freelancer, one sentence on that page carries the most weight: “to the extent gross receipts are generated by the shareholder’s personal services, then payments to the shareholder-employee should be classified as wages that are subject to employment taxes.” The page lists factors such as “Training and experience,” “Duties and responsibilities” and “Time and effort devoted to the business.” A workable starting point is what a business would pay a non-owner to do your work at your hours, written down with the sources you used. How to Pay Yourself as a Freelancer or LLC Owner: Draws vs Salary shows how the salary and distributions fit into a monthly pay routine.

What the Election Adds to Running Your LLC

An S corp election brings filings and charges that a default LLC does not have:

• Payroll returns. The IRS employment tax due dates page lists Form 941 each quarter, due April 30, July 31, October 31 and January 31, plus Form 940 for federal unemployment tax and a Form W-2 for you by January 31.
• Federal unemployment tax. IRS Topic 759 sets the FUTA rate at 6.0 percent of the first $7,000 of wages, or 0.6 percent after the full state credit. On one salary that is $42 a year, plus your state’s own unemployment tax.
• A second tax return. Form 1120-S is due by the 15th day of the third month after the tax year ends, which is March 15, 2027 for calendar 2026. The Instructions for Form 1120-S charge a late filing penalty on a return with no tax due “for each month or part of a month (up to 12 months),” multiplied by the number of shareholders, and Revenue Procedure 2025-32 sets it at $260 a month for returns due in 2027.
• State charges. California’s Franchise Tax Board taxes S corporations at 1.5 percent of net income, with an $800 minimum franchise tax that it waives for a newly formed or qualified S corporation’s first taxable year. A California LLC taxed by default already owes the state’s $800 LLC annual tax, so ask a California preparer what the election changes there. Illinois lists a personal property replacement tax of 1.5 percent of net income for “Partnerships, trusts, and S corporations.” A one-owner LLC taxed by default does not pay it: the Illinois Department of Revenue puts that LLC’s income on the owner’s Form IL-1040. The SBA adds that some states “don’t recognize the S corp election at all, simply treating the business as a C corp.”

The election also stays put. The Form 2553 instructions say it “stays in effect until it is terminated or revoked,” and IRS consent is generally needed to elect again before the fifth tax year after a termination or revocation takes effect.

Disadvantages of an S Corp for a Freelancer

• A salary you must pay. Payroll runs on a schedule, even in a slow month, and distributions taken without a reasonable salary can be reclassified as wages.
• A smaller QBI deduction. Salary is not qualified business income, which is why the deduction fell from $33,957 to $18,070 in the $200,000 example.
• Less retirement room on a modest salary. The IRS retirement plan FAQ for S corporations says “You can’t make contributions to a self-employed retirement plan from your S corporation distributions,” so contributions are figured on your W-2 pay. Retirement Accounts for Freelancers: SEP IRA vs Solo 401(k) in 2026 compares the plans.
• Smaller Social Security earnings. Topic 554 notes that the Social Security Administration uses Schedule SE to compute benefits. Once you elect, only your salary is taxed for Social Security, so distributions add nothing to your earnings record.
• Ownership limits. No partnership, corporation or nonresident alien owners, at most 100 shareholders and one class of stock, which can block plans to bring in a partner or investor later.
• More paperwork and fees. Payroll, a separate return, state entity taxes in some states and a preparer who knows S corp returns.

How an S Corp and an LLC Can Own Each Other

An S corp can own 100 percent of an LLC. The IRS page on single-member LLCs says “If the single-member LLC is owned by a corporation or partnership, the LLC should be reflected on its owner’s federal tax return as a division of the corporation or partnership.” The LLC’s income and expenses go on the S corp’s Form 1120-S, while the LLC stays a separate company under state law. That setup can keep a second line of work, such as a digital product business, in its own LLC while all the profit flows through one S corp and one payroll.

The reverse is narrower. An LLC with two or more members is a partnership by default, and partnerships cannot hold S corp stock. A disregarded single-member LLC can, because the IRS looks through it to its owner. The Form 2553 instructions say that if such an LLC owns stock, you “enter the owner’s name and address,” and “The owner must be eligible to be an S corporation shareholder.”

How to Decide Whether Your LLC Should Elect S Corp Status

1. Estimate next year’s profit. Use a realistic figure, not your best month multiplied by 12. Our income goal planner is a place to set that number.
2. Set a salary you can defend. Base it on market pay for your role and hours, and write down where the figures came from.
3. Get two quotes. Ask one provider for payroll and one preparer for Form 1120-S, and read your state revenue department’s page on S corporations.
4. Rebuild the example. Repeat the steps above with your profit, salary and costs. Our self-employment tax calculator gives the default LLC side. If the saving is only a few hundred dollars, the default LLC is simpler and carries less risk.
5. File Form 2553 on time. For a January 1, 2027 start, file by March 15, 2027, and keep the CP261 notice when it arrives.
6. Start payroll and adjust your tax payments. Run the first payroll before you take distributions. Withholding on your salary now covers part of your tax, so recalculate your estimated payments with How Much to Set Aside for Taxes on 1099 Income in 2026.

Conclusion

An LLC is the legal entity that keeps business claims away from your personal assets, and the S corp election is a federal tax choice that the LLC can make by filing Form 2553. Without the election, a one-owner LLC is taxed like a sole proprietorship, with self-employment tax on all profit. With it, payroll tax applies to the salary only, while a smaller QBI deduction, payroll and a second return take part of the saving back.

In our 2026 examples, the election lost $488 at $70,000 of profit and saved $6,049 at $200,000 with a $100,000 salary, and it turned into a $1,404 loss when the salary rose to $140,000. Run the comparison with your own profit, a salary you can support with market data, and real cost quotes. If the numbers still work, file Form 2553 by March 15, 2027 for the 2027 tax year.

Key Takeaways

• An LLC is a business structure created under state law, and an S corp is a federal tax status that an eligible LLC elects on Form 2553 without filing Form 8832.
• By default, a single-member LLC is taxed like a sole proprietorship, with 15.3 percent self-employment tax on 92.35 percent of profit and the Social Security part capped at $184,500 in 2026.
• In our 2026 single-filer examples with $2,000 of running costs, the election cost $488 more at $70,000 of profit with a $50,000 salary and saved $6,049 at $200,000 with a $100,000 salary.
• At $200,000 of profit, each extra $20,000 of salary cut the saving by about $3,726, and a $140,000 salary produced a $1,404 loss.
• S corp salary is not qualified business income, so the QBI deduction in the $200,000 example fell from $33,957 to $18,070.
• Partnerships, corporations and nonresident aliens cannot be S corp shareholders, and a calendar-year election for 2027 is due by March 15, 2027.

Frequently Asked Questions

Do you pay more taxes as an LLC or an S corp?

It depends on your profit and your salary. A one-owner LLC taxed by default pays self-employment tax on all profit, while an S corp pays payroll tax only on the salary but loses part of the QBI deduction and adds running costs. In our 2026 single-filer examples, the S corp paid $488 more at $70,000 of profit and $6,049 less at $200,000, after $2,000 of costs.

How much tax does an S corp that earns $200,000 pay?

An S corp generally pays no federal income tax itself, because its profit passes through to the owner’s return, though some states tax it, such as California at 1.5 percent. In our 2026 example for a single filer with $200,000 of profit, a $100,000 salary and $2,000 of running costs deducted by the business, the federal bill was $15,300 of payroll tax and $30,081 of income tax, $47,381 with the costs. The same profit in a default LLC came to $53,430.

What are the disadvantages of an S corp?

You must pay yourself a reasonable salary through payroll before distributions, and the IRS can reclassify distributions as wages. Salary does not count for the QBI deduction, retirement contributions are based on W-2 pay only, and you file Form 1120-S plus quarterly payroll returns. California and Illinois each add a 1.5 percent tax on S corp income, and owners are limited to 100 eligible shareholders with no nonresident aliens.

Can an S corp own 100% of an LLC?

Yes. The IRS treats a single-member LLC owned by a corporation as a division of that corporation, so the LLC’s income and expenses go on the S corp’s Form 1120-S. The reverse is limited: a disregarded single-member LLC can hold S corp stock if its owner is an eligible shareholder, but an LLC taxed as a partnership cannot.

When is the deadline to elect S corp status for 2027?

For a calendar-year business, Form 2553 can be filed any time during 2026 or by March 15, 2027, which is 2 months and 15 days after the 2027 tax year begins. A newly formed entity counts from the start of its own first tax year instead. The IRS says it generally decides within 60 days and confirms acceptance with a CP261 notice.