“Should I be an LLC or an S corp?” is one of the most common questions small business owners ask, and the question itself hides the answer. An LLC and an S corp are not two options of the same kind. An LLC is a legal entity you form with a state. An S corp is a way the IRS taxes a business. Many businesses are both: an LLC that has elected S corp tax treatment. This guide explains what changes when you make that election, what it saves, what it costs, and the extra rules that apply in New Jersey.
LLC vs S corp: the difference in one table
| LLC (default tax treatment) | LLC or corporation taxed as an S corp | |
|---|---|---|
| What it is | A legal entity formed under state law | A federal tax status chosen on Form 2553 |
| Liability protection | Yes, from the LLC | Same. The election does not change it. |
| How profit is taxed | Passes through to the owner’s return (Schedule C for one owner, Form 1065 for several) | Passes through to the owners on Schedule K-1 from Form 1120-S |
| Self-employment / payroll tax | On all net profit, as self-employment tax | Only on the salary paid to owner-employees |
| Owner pay | Draws, no payroll needed | A reasonable salary through payroll, plus distributions |
| Business tax return | None for one owner (Schedule C); Form 1065 for several | Form 1120-S, due March 15 for calendar-year companies |
| Who can own it | Anyone, including foreign persons | Up to 100 shareholders; no nonresident aliens, no partnerships or corporations |
| Running cost | Low | Higher: payroll, a separate return, more bookkeeping |
The IRS LLC page describes the default rules. A single-member LLC is taxed like a sole proprietorship, and an LLC with two or more members like a partnership, unless it elects otherwise.
Where the S corp saving comes from
As a default LLC owner, you pay self-employment tax on your net profit: 15.3% (12.4% Social Security plus 2.9% Medicare) on 92.35% of net earnings, with the Social Security part stopping at the 2026 wage base of $184,500 (IRS Topic 554, SSA).
As an S corp, the company pays you a salary through payroll. Payroll taxes apply to that salary: 7.65% withheld from you and 7.65% paid by the company. The profit left after your salary passes to you as a distribution, and distributions do not carry payroll tax. Income tax applies either way.
So the saving is roughly 15.3% of the profit above your salary, minus the cost of running the S corp. That is why the salary decision matters so much.
A worked example
Our free S corp tax calculator uses these numbers by default:
| Amount | |
|---|---|
| Net profit before owner pay | $120,000 |
| Self-employment tax as a default LLC | $16,955 |
| Payroll taxes on a $60,000 salary (both halves) | $9,180 |
| Federal unemployment tax (FUTA) | $42 |
| Extra yearly S corp costs (payroll service, 1120-S, state fees) | $2,000 |
| Estimated yearly saving | about $5,733 |
The same calculator shows the election costing about $980 more at $40,000 of profit with a $30,000 salary, because the fixed costs outweigh the saving. At $60,000 of profit with a $35,000 salary, it saves about $1,081. You can run your own numbers in the calculator at the end of this article.
Reasonable salary: the part that decides everything
The IRS requires S corporation shareholder-employees to receive reasonable compensation for their work before taking distributions (IRS guidance). If the salary is too low, the IRS can treat distributions as wages and assess the payroll tax, interest and penalties.
There is no safe percentage. The IRS looks at factors such as:
- your training and experience,
- your duties and the time you spend on the business,
- what comparable businesses pay for similar services, and
- the company’s compensation and distribution history.
A practical test: what would you have to pay someone else to do your job? A designer whose company earns $120,000 almost entirely from their own design work will have a hard time defending a $20,000 salary.
What the S corp election costs
The saving is easy to overstate because the costs are less visible:
- Payroll every month. Federal withholding, Form 941 every quarter, Form 940 and W-2 every year, plus state payroll filings. Most owners use a payroll service.
- A separate business return. Form 1120-S is due on the 15th day of the 3rd month after year-end: March 15 for a calendar-year company. Late filing carries a penalty for each shareholder for each month the return is late.
- More bookkeeping. Clean books, reconciled accounts and a proper split between salary, distributions and reimbursements.
- State taxes and fees (in New Jersey, see below).
- Smaller deductions elsewhere. Your salary no longer counts as qualified business income, so the 20% QBI deduction can shrink. A lower salary can also mean lower retirement plan contributions and lower earnings credited for future Social Security benefits.
New Jersey: the extra rules
New Jersey treats S corporations differently from LLCs in ways that affect the math:
- No separate state election needed any more. For privilege periods beginning on or after December 22, 2022, a federal S corporation is treated as a New Jersey S corporation by default, according to the NJ Division of Taxation. The old Form CBT-2553 election is no longer required.
- A yearly minimum tax. A New Jersey S corporation pays a minimum tax of currently $375 to $1,500, depending on its New Jersey gross receipts. A default single-member LLC does not.
- State payroll contributions on your salary. New Jersey withholds unemployment, disability and family leave contributions from wages, and the company pays its own unemployment and disability contributions. Our NJ paycheck calculator shows the 2026 amounts for a given salary.
- The annual report stays the same. The LLC still files its $75 New Jersey annual report every year.
Put the New Jersey minimum tax and the payroll service into the “extra cost” field of the calculator, and the result reflects your real situation.
When the election usually makes sense
The S corp election tends to pay off when:
- profit is steady and comfortably above a salary you can defend,
- you are ready to run payroll every month and keep clean books, and
- every owner is a U.S. citizen or resident.
It usually does not make sense when:
- profit is low or swings a lot from year to year,
- you are not ready for payroll and a separate return, or
- an owner is a nonresident alien. S corporations cannot have nonresident alien shareholders, so a founder living abroad who is not a U.S. citizen or green card holder keeps the LLC’s default treatment or uses a C corporation. Our foreign-owned LLC page covers that case.
How to switch an LLC to S corp taxation
- Check eligibility: owners, number of shareholders, and one class of ownership interests.
- File Form 2553 with the IRS, signed by every owner. For a calendar-year company it is due by March 15 of the year the election should start, or at any time during the year before. An LLC that files Form 2553 on time does not need to file Form 8832 separately (Form 2553 instructions).
- Set up payroll before the first salary payment, including New Jersey employer registration if the business is here.
- Set a reasonable salary and document how you arrived at it.
- Change your bookkeeping so salary, distributions and reimbursements are recorded separately.
Missed the March 15 deadline? Relief for late elections is often available under Rev. Proc. 2013-30, generally within 3 years and 75 days of the intended effective date.
Getting the numbers right
The LLC vs S corp question is a math problem with three inputs: your profit, a salary you can defend, and the true cost of running an S corp. Run your numbers in the calculator below. If the election looks worthwhile, our S corp election service covers the eligibility check, Form 2553 and the payroll setup, and tax planning tests the salary against your full return, income tax included. If you have not formed the business yet, start with a New Jersey LLC and add the election once profit justifies it.