S Corporation (Subchapter S) and S Corp Tax Rate
An S corporation (S corp) is a tax structure under Subchapter S of the IRS (Internal Revenue Service) for federal, state, and local income tax purposes that is elected by either an LLC or a corporation.
S corps are not taxed at the business level so there is no double taxation as in a C corporation. In an S corp, business owners are salaried employees with a “reasonable” salary (based on market compensation for industry, position, and experience) where the owners pay only on their salary the following taxes:
- Self-employment taxes
- Income tax
The remaining net profits, called distributions, only pay:
- Income tax
By only paying income tax on distributions, an S corp saves the business owner(s) money on self-employment taxes under the right circumstances.
However, to ensure that a business owner’s salary is reasonable, the IRS places closer attention to businesses that elect the S corp tax status. There are also other requirements the IRS imposes on an S corp. Some of these include a maximum of 100 shareholders, who can only be U.S. citizens and permanent resident aliens to participate, among other restrictions.
In contrast to an S corp:
- A corporation C is known for its double taxation - this means that the business is taxed and the shareholders are taxed again at their individual tax rate on their personal income tax return.
- A default LLC has pass-through taxation - this means that all earnings pass through to the owner, where the owner(s) pays both self-employment taxes and income tax on net profits (earnings minus business operational costs).
S Corp Tax Rate
Since S corp income isn’t taxed at the business level, it passes through to the owner’s individual tax return. As a result, there isn't a specific tax rate for an S corp like there is for a corporation. Instead, S corps are only subject to:
- Federal income tax
- State income tax
- FICA employee taxes
S Corp Federal and State Income Tax Rate
The owner(s) of an S corp are considered employees for tax purposes. This means that income from the S corp in the form of reasonable salaries and distributions passes through to the owner-employee’s individual income tax return.
Tax on S Corp Salary
Like any other employee, an S corp owner must pay federal and state income taxes. S corp owners also must pay their employee portion of FICA taxes on their reasonable salary and the S Corp itself pays the other half (which can be written off as a business expense).
Tax Rate on S Corp Distributions
Distributions are subject to only federal and state income taxes.
Your taxable income, the tax bracket for your taxable income, and your filing status determine the amount of your federal and state income taxes.
FICA Employer and Employee Taxes
FICA taxes cover Medicare and Social Security tax that all employees must pay. Employers and employees split this tax 50/50.
Because the owners of an S corp are considered employees, they don’t have to pay self-employment tax (full FICA tax) on their salary.
Distributions are only subject to state and federal income tax.
When to Elect S Corp Status for an LLC
The following criteria determine whether electing the S corp tax classification makes sense for an LLC:
- The business must meet IRS S corp requirements
- The business owner(s) must consistently earn a "reasonable salary"
- The business owner(s) should be able to pay themselves at least $20,000 in distributions
- The financial tax advantage must offset the cost of maintaining the S corp
IRS S Corp Requirements and Restrictions
The following are S corp requirements and restrictions for eligibility to elect this type of tax status for your business:
If an LLC elects S corp, the LLC’s owners become employees of the company. Under IRS rules, owner-employees must be paid a reasonable salary – that is, a salary that someone doing the same job would normally earn. The IRS looks to make sure that the S corp is paying its owners reasonable salaries. If a company fails to do so, it may be denied S corp status, have to pay a fine, and/or be required to pay back taxes.
Profit and Distribution
After electing S corp status, an LLC owner uses profits to pay salaries and distributions to owner-employees. The business must make at least $60,000 in earnings, be able to cover a reasonable salary, and have at least $20,000 in annual distributions for the S corp election to make financial sense.
If an LLC owner forfeits a salary, he or she could be fined by the IRS.
Positive Return on Investment
Although the IRS charges minimal filing fees to elect S corp status, there are additional bookkeeping and payroll costs that can be expensive. Some LLCs already have employees and payroll costs, in which case this isn’t really a factor in deciding whether to elect S corp.
Because of the added administrative costs, the tax advantages of electing the S corp classification must be substantial enough to more than cover them for the election to make sense. Generally speaking, a reasonable salary plus $20,000 in annual distributions is often enough to save money on your tax return.
For help choosing payroll and accounting services, see our review of the Best Payroll Software for Small Business.
S Corp vs LLC Tax Savings Calculator
Electing S corp status allows LLC owners to be taxed as employees of the business. This allows owners to pay less in self-employment taxes and contribute pre-tax dollars to 401k and health insurance premiums.
Our calculator will estimate whether electing S corp will result in a tax win for your business. Before using the calculator, you will need to:
S Corp Savings Calculator
Calculate how much you can save by choosing an S Corp tax classification
As a Sole Proprietorship or Single-Member LLC
Self Employment Tax:
Salary Employer Tax
(S Corp pays)
Savings on Self Employment Taxes
Against this savings, you have to balance the time and costs of running payroll and tax withholding. To learn more about what this will cost, get a free tax consultation.
Hire a professional service provider like Collective for all your S corporation needs, including:
- S corp formation or to convert an existing business
- Registered agent services and obtaining an EIN
- Managing your monthly accounting (payroll, bookkeeping)
- Personalized service with a back office team
- Keeping your business compliant with regulatory obligations
- Helping you find potential business tax savings, and more.
Connect with Collective to start your S corp!
How to Start an S Corp
- An existing LLC or corporation
- A new LLC or corporation (we don’t recommend starting a corporation and electing S corp status)
For detailed, step-by-step instructions for starting an S corp in your state, choose your state:
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- Washington D.C.
- West Virginia
S Corp Tax Return FAQ
Do S corps pay income tax?
S corps don’t pay a corporate income tax. Instead, owners pay personal income tax on the company’s earnings. For more information, see our S Corp Taxes guide.
Who pays more taxes, LLC or S corp?
This depends on how much the company makes. As a general rule of thumb, it only makes sense to file taxes as an S corp if there is enough net profit to pay owners a reasonable salary and at least $20,000 in annual distributions.
What is the S corp tax rate?
The S corp doesn’t have a specific tax rate because S corp income passes through to the owner’s individual tax return. At that point, the S corp income is subject to federal, state, and FICA taxes based on the individual owner’s tax bracket and filing status.
For more information, see our S Corp Taxes guide.
Does an S corp have limited liability protection?
An S corp is a tax status that can be elected by an LLC or corporation. LLCs and corporations have limited liability protection. A business owner will not lose liability protection by electing S corp tax status.
For more information, see our What is an S Corporation?
Where can I find S corp tax return forms?
You can find the PDF IRS tax returns forms in our S Corp Tax Returns guide.
Is subchapter S the same thing as an S corp?
Yes, subchapter S is the same thing as an S corp. For more information, see our What is an S Corporation guide.
How an S Corp is taxed?
An S corp is a pass-through tax status. The S corp isn’t taxed on its profit. Instead, the profit passes through to the owner's individual tax returns. An S corp does have to pay employer FICA taxes on employee salaries. For more information, see our S Corp Taxes guide.
Does an S corp have to file taxes?
Yes, an S corp files taxes at the state and federal level. For more information, see our S Corp Taxes guide.
Which is better for taxes, an LLC or an S corp?
The default LLC tax status is better for small businesses that reinvest profit to grow their business. An S corp is better for businesses that have profit left over to pay owners a reasonable salary and at least $20,000 in annual distributions.
For more information, see our LLC vs. S Corp guide.
Do S corps pay state income tax?
Yes, S corp income passes through to the owner’s individual tax returns and is subject to state income taxes.
For more information, see our S Corp Taxes guide.
Does an S corp owner have to take a salary?
Yes, an S corp owner must take a reasonable salary per IRS guidelines. Reasonable is defined as being a fair market salary for the work performed.
For more information, see our What is an S Corporation guide.
SBA - Business Structure: https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
SBA - S corporations: https://www.sba.com/legal/s-corporation/
SBA - Tax Planning and Reporting for Small Business: https://www.sba.gov/sites/default/files/files/PARTICIPANT_GUIDE_TAX_PLANNING.pdf
IRS - Limited Liability Company (LLC): https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
IRS - S Corporations: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
IRS - Forming a Corporation: https://www.irs.gov/businesses/small-businesses-self-employed/forming-a-corporation
IRS - Tax Information on S Corps: https://www.irs.gov/pub/irs-prior/p589--1995.pdf
IRS - Instructions for Form 1120s: https://www.irs.gov/pub/irs-pdf/i1120s.pdf
IRS - Where to File Form 1120s: https://www.irs.gov/filing/where-to-file-your-taxes-for-form-1120-s