Business structure
S corp vs LLC: what changes when an LLC elects S corporation taxes
An S corp is not a different kind of company you form instead of an LLC. It is a tax status: an LLC, or a corporation, files Form 2553 and is then taxed under subchapter S. The LLC stays an LLC under state law. What changes is self-employment tax: a regular LLC owner pays 15.3% on almost all of the profit, while an S corp owner pays it only on a salary. For a single owner in Illinois with $100,000 of profit, that works out to about $3,500 a year less tax before the cost of running payroll and filing a corporate return.
S corp vs LLC at a glance
The comparison below is a single-member LLC taxed the default way against the same LLC after an S corporation election.
| Item | LLC (default tax treatment) | LLC taxed as an S corp |
|---|---|---|
| Federal return | Schedule C on your Form 1040 (Form 1065 if two or more members) | Form 1120-S, plus a Schedule K-1 to each owner |
| Self-employment or payroll tax | 15.3% on 92.35% of profit | 15.3% on your salary only |
| Salary required | No | Yes, a reasonable salary through payroll |
| Payroll filings | None for the owner | Form 941 each quarter, Form 940, W-2 |
| Who can own it | Anyone, including foreign owners and companies | Up to 100 shareholders; no nonresident aliens, partnerships or corporations |
| QBI deduction | On profit after half of self-employment tax | On profit after salary only |
| Illinois replacement tax | None for a single-member LLC (1.5% for a multi-member LLC) | 1.5% of net income |
Can an LLC be an S corp?
Yes. An LLC that meets the S corporation tests files Form 2553, signed by all of its owners, and is taxed as an S corporation from the effective date. It does not need to file Form 8832 as well: an eligible LLC that makes a timely S election is treated as a corporation from that date. Under state law nothing changes. It keeps its name, its articles and its annual report.
Without an election the IRS treats a single-member LLC as part of its owner (a disregarded entity) and an LLC with two or more members as a partnership.
Worked example: $100,000 of profit in Illinois
A single owner of a one-member LLC expects $100,000 of profit in 2026, files single and takes the standard deduction. As an S corp the owner pays a $50,000 salary. The figures below are 2026 federal rules and Illinois rates.
| Step | Amount |
|---|---|
| Self-employment tax as an LLC (15.3% of $92,350) | $14,130 |
| Social Security and Medicare on a $50,000 salary (both halves) | $7,650 |
| Payroll tax saved | $6,480 |
| Less: extra federal income tax (the QBI deduction falls from $15,367 to $9,235) | −$2,062 |
| Less: extra Illinois income tax (4.95%) | −$160 |
| Less: Illinois replacement tax (1.5% of $46,175) | −$693 |
| Less: federal unemployment tax (0.6% of $7,000) | −$42 |
| Net saving before running costs | about $3,523 |
- A higher salary shrinks the saving; a salary the IRS considers too low puts the whole saving at risk.
- With less profit, the running costs can cancel the saving. That is why the answer depends on your own numbers rather than a single profit threshold.
Reasonable salary: the rule that decides the saving
An S corporation must pay a shareholder who works in the business reasonable compensation before it pays out distributions. The IRS can reclassify distributions as wages, with back payroll taxes, when the salary is too low, and courts have upheld that more than once.
Reasonable means what the business would pay someone else to do the work the owner does. Profit that comes from the owner’s own services points to a higher salary; profit from employees, equipment or capital points to a lower one. Keep a short written record of how you set it.
Who cannot be an S corp
The election is only for domestic businesses with no more than 100 shareholders and one class of stock, owned by individuals, certain trusts and estates. A partnership, a corporation or a nonresident alien cannot be a shareholder.
That last rule matters for immigrant-owned businesses: a US LLC owned by someone who lives abroad and is not a US tax resident cannot be an S corp, however profitable it is. Those LLCs usually file Form 5472 instead. A green card holder or someone who passes the substantial presence test is a resident for tax purposes and can be a shareholder.
How and when to switch
File Form 2553 no later than 2 months and 15 days after the start of the tax year the election should take effect, or at any time during the year before. For a calendar-year LLC that wants S corporation treatment for 2027, that means any time in the rest of 2026 or by March 15, 2027.
A missed deadline can usually be fixed under Rev. Proc. 2013-30, which gives relief for late elections within 3 years and 75 days when the only problem is timing.
Once the election is in place, set up payroll before the first distribution, and plan for the S corporation’s own returns: Form 1120-S federally and the Illinois return each year.
Is an S corp worth it for you?
Our tax planning assessment compares staying an LLC with an S corp salary on your own numbers, including payroll and the extra returns. $195, in person in Naperville, IL, by phone or by Zoom.
Questions people ask
Is an S corp an LLC?
Not necessarily. An S corp is a tax status, not a type of business. Both an LLC and a corporation can elect it. An LLC that elects it is still an LLC under state law, taxed as an S corporation.
Which pays less tax, an S corp or an LLC?
Once profit is well above a reasonable salary, an LLC taxed as an S corp usually pays less, because Social Security and Medicare tax applies only to the salary. Below that, payroll and the extra return can cost more than the tax saved.
Can a single-member LLC be an S corp?
Yes. A single-member LLC can file Form 2553 and pay its owner a salary through payroll like any other S corporation.
Can a nonresident own an S corp?
No. A nonresident alien cannot be an S corporation shareholder, so an LLC with a nonresident owner cannot elect S status.
When is the deadline to elect S corp status for 2027?
For a calendar-year business, file Form 2553 any time before the end of 2026 or by March 15, 2027.
Do I pay Illinois tax as an S corp?
The S corporation pays Illinois replacement tax of 1.5% of its net income, and you pay Illinois income tax of 4.95% on your salary and your share of the profit. A single-member LLC taxed the default way pays no replacement tax.
Where these rules come from
- IRS: S corporations
- IRS: Limited liability company (LLC)
- IRS: S corporation compensation and medical insurance issues
- IRS: About Form 2553
- IRS Topic 759: Form 940, federal unemployment tax
- Illinois Department of Revenue: tax rates
General information, current when written, not advice about your situation. Fees and forms change; the official pages above are the authority.
