# S Corp vs. LLC for Contractors: Which Is Better?

An LLC is a legal structure created under state law; an S corporation is a federal tax election. A contracting LLC can elect S corp taxation. The election can cut self-employment tax because only the owner's reasonable salary is subject to payroll tax, but it adds payroll and filing costs, so it usually pays only once profits are steady.

## Key takeaways

- LLC vs. S corp isn't either/or: an LLC is how you're organized under state law; S corp status is how the IRS taxes the profit. Many contractors are an LLC taxed as an S corp.
- By default a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership, so the owners pay self-employment tax on all the profit.
- As an S corp, you pay yourself a reasonable salary through payroll. Payroll taxes apply to the salary; remaining profit can be distributed without payroll tax.
- The savings shrink once you add payroll costs, a separate Form 1120-S, state fees or taxes, and a smaller QBI deduction. Run the numbers with a CPA first.
- To elect, file Form 2553 no more than 2 months and 15 days after the start of the tax year you want it to take effect, or any time in the year before.

## What's the difference between an LLC and an S corp?

An LLC is a business structure allowed by state statute. You form it with your state, and it's mainly about separating the business from you legally. The IRS doesn't have an "LLC" tax category. By default, it taxes a single-member LLC as **disregarded** (like a sole proprietorship, on your Schedule C) and an LLC with two or more members as a **partnership**.

An S corporation is a tax status you elect by filing Form 2553. The business still files its own return (Form 1120-S), but profit passes through to the owners' personal returns, so there's no corporate-level income tax in most cases. An eligible LLC that files Form 2553 is treated as a corporation from the S election's effective date and doesn't need to file a separate Form 8832.

**LLC (default taxation) vs. S corporation election**

|  | LLC, default tax treatment | S corporation (corp or LLC that elected) |
| --- | --- | --- |
| What it is | State-law entity | Federal tax election (Form 2553) |
| Federal income tax return | Single member: Schedule C on your 1040. Multi-member: Form 1065 | Form 1120-S, plus Schedule K-1s to owners |
| How the owner gets paid | Draws; all net profit is self-employment income | W-2 salary through payroll, plus distributions |
| Self-employment / payroll tax | SE tax on 92.35% of net profit: 12.4% Social Security (to the wage base) + 2.9% Medicare | FICA on salary only (7.65% employer + 7.65% employee); distributions aren't subject to employment taxes |
| Owner rules | Few federal limits | Up to 100 shareholders, only allowable shareholders (generally individuals, certain trusts and estates), one class of stock, domestic |
| Extra admin | Low | Payroll, quarterly payroll returns, W-2 for yourself, separate business return |

_Sources: IRS pages on LLCs, S corporations and Topic No. 554; IRS Publication 15 (2026). Checked 2026-10-12._

## How does an S corp save a contractor money?

The savings come from [self-employment tax](https://www.brix.so/learn/self-employment-tax). As a sole proprietor or default LLC, you pay roughly 15.3% on 92.35% of your net profit (Social Security stops at the $184,500 wage base for 2026; Medicare doesn't stop). As an S corp, only your salary carries the equivalent payroll taxes. Profit above a [reasonable salary](https://www.brix.so/learn/reasonable-salary-s-corp) can come out as distributions, which the IRS says are not subject to employment taxes.

> **Example: a roofing company with $150,000 of net profit in 2026 (illustrative)**
>
> **Default single-member LLC:** self-employment tax is 15.3% × (92.35% × $150,000) = 15.3% × $138,525 = **$21,194**.
>
> **LLC taxed as an S corp, paying the owner a $80,000 salary:** FICA on the salary, both halves, is 15.3% × $80,000 = $12,240, plus $42 FUTA, for **$12,282**. The rest of the profit comes out as distributions.
>
> **Gross difference: about $8,912** before the new costs: a payroll service, preparing Form 1120-S, any state S corp or franchise taxes and fees, and state unemployment tax on your salary. The salary is also not qualified business income, so your [QBI deduction](https://www.brix.so/learn/qbi-deduction) usually shrinks.
>
> Whether $80,000 is reasonable depends on what a roofing company would pay someone to do this owner's job. Pick the salary from that, not from the tax savings you want.

## When should a contractor become an S corp?

There's no IRS profit threshold; it's a math problem with your numbers. The election usually starts to make sense when profit is consistently well above what a reasonable salary for your role would be, so there's meaningful profit left to distribute, and the business is steady enough to run payroll every period. Ask a CPA to compare your total cost under both structures, including state taxes, before you file.

- **Profit is reliable, not one good year.** A salary has to be paid through payroll whether or not the season was slow.
- **Profit comfortably exceeds a reasonable salary.** If almost all your profit would be salary anyway, there's little left to save.
- **You'll keep up with payroll.** Deposits, quarterly Form 941s and a W-2 for yourself, every year.
- **Your state doesn't erase the savings.** Some states tax S corporations or charge annual fees; check your [state tax guide](https://www.brix.so/taxes).
- **You understand the trade-offs.** Lower Social Security wages can mean lower future Social Security benefits, and the QBI deduction is calculated on a smaller number.

## How do you elect S corp status?

1. **Form the entity under state law.** Usually an LLC or corporation, registered with your state, with an EIN from the IRS.
2. **Confirm you qualify.** Domestic, no more than 100 shareholders, only allowable shareholders, one class of stock.
3. **File Form 2553 on time.** No more than 2 months and 15 days after the beginning of the tax year it should take effect, or at any time in the year before. All shareholders sign. Late-election relief may be available for reasonable cause under Rev. Proc. 2013-30.
4. **Set up payroll for yourself.** Pay a reasonable salary with withholding, deposits and quarterly Form 941s. See [payroll taxes](https://www.brix.so/learn/payroll-taxes).
5. **Keep business and personal money separate.** Distributions should be documented, and personal expenses shouldn't run through the company.

## LLC vs. S corp by trade

**How the decision tends to look (patterns, not advice)**

| Business | What usually drives the decision |
| --- | --- |
| Owner-operator handyman or cleaning business | Profit often close to a reasonable wage for the owner; savings may not cover the extra admin |
| HVAC or plumbing shop with several techs | Owner's role is partly management; profit beyond a manager's salary can be meaningful |
| Roofing or storm restoration | Profit swings by season and storm year; a salary must be paid in lean years too |
| Electrical contractor with commercial work | Steadier profit and existing payroll make the admin easier to absorb |
| Landscaping with seasonal crews | Payroll already runs for crews; adding the owner is incremental |

## Common mistakes

- **Thinking an LLC saves tax by itself.** A default LLC is taxed just like a sole proprietorship or partnership.
- **Skipping the salary.** Taking only distributions from an S corp invites the IRS to recharacterize them as wages, with employment taxes due.
- **Electing in a thin year.** Payroll for the owner is due even when there's no profit to distribute.
- **Forgetting state rules.** State taxes and fees can change the answer.
- **Missing the Form 2553 window.** The election timing matters; late relief is possible but takes paperwork.

BRIX keeps every job's revenue and expenses categorized and synced with QuickBooks, so you and your CPA can see real, current profit when you weigh an S corp election. BRIX doesn't choose your entity, file returns or give tax advice.

- [Bookkeeping and tax help](https://www.brix.so/features/bookkeeping-taxes): Keeps expenses categorized, tracks 1099 subcontractors and sales tax, and reminds you of quarterly estimated tax dates. BRIX does not file taxes or give tax advice.
- [QuickBooks sync](https://www.brix.so/integrations/quickbooks): Syncs customers, invoices and payments with QuickBooks so the books match the jobs.

## Frequently asked questions

### Is an LLC or S corp better for a contractor?

They answer different questions. An LLC is a state-law structure; an S corp is a federal tax election that an LLC can make. For a small contractor, the common path is to form an LLC, then elect S corp taxation once profits are high and steady enough for the payroll savings to outweigh the added costs.

### When should a contractor become an S corp?

When steady profit comfortably exceeds a reasonable salary for the owner's role, so meaningful profit can come out as distributions, and the savings beat the extra costs of payroll, a separate return and state fees. There's no IRS dollar threshold, so have a CPA compare both structures with your numbers.

### Can an LLC be taxed as an S corp?

Yes. An eligible LLC files Form 2553, and the IRS treats it as a corporation from the S election's effective date. Its instructions say an entity that qualifies this way doesn't need to file Form 8832 separately.

### What is the deadline to elect S corp status?

Form 2553 must be filed 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 preceding tax year. Late-election relief may be available under Rev. Proc. 2013-30 if there was reasonable cause.

### Does an S corp avoid self-employment tax completely?

No. The owner's reasonable salary is subject to Social Security and Medicare taxes through payroll, both the employer and employee halves. Only distributions above that salary avoid employment taxes, and the IRS can reclassify distributions as wages if the salary is unreasonably low.

### What are the downsides of an S corp for a small contractor?

You must run payroll for yourself, file Form 1120-S and quarterly payroll returns, and pay any state S corp taxes or fees. Your QBI deduction is figured on profit after your salary, and lower Social Security wages can mean lower future benefits.

## Related

- [What Is a Reasonable Salary for an S Corp Owner?](https://www.brix.so/learn/reasonable-salary-s-corp)
- [What Is the QBI Deduction?](https://www.brix.so/learn/qbi-deduction)
- [What Are Payroll Taxes?](https://www.brix.so/learn/payroll-taxes)
- [What Is Self-Employment Tax?](https://www.brix.so/learn/self-employment-tax)
- [Self-Employment Tax Calculator (2026)](https://www.brix.so/tools/self-employment-tax-calculator)
- [True Cost of an Employee Calculator for Trades Businesses](https://www.brix.so/tools/payroll-cost-calculator)
- [Taxes for Contractors: The 2026 Guide for Self-Employed Trades Owners](https://www.brix.so/guides/contractor-taxes)
- [Bookkeeping for contractors that keeps your books tax-ready all year](https://www.brix.so/features/bookkeeping-taxes)
- [Quarterly Estimated Tax Calculator for Self-Employed Contractors (2026)](https://www.brix.so/tools/quarterly-estimated-tax-calculator)
- [Mileage Deduction Calculator for Contractors (2026)](https://www.brix.so/tools/mileage-deduction-calculator)

## Sources

- [IRS — Limited liability company (LLC)](https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc) (checked 2026-10-12)
- [IRS — S corporations](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations) (checked 2026-10-12)
- [IRS — Instructions for Form 2553](https://www.irs.gov/instructions/i2553) (checked 2026-10-12)
- [IRS — S corporation compensation and medical insurance issues](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues) (checked 2026-10-12)
- [IRS — Topic No. 554, Self-employment tax](https://www.irs.gov/taxtopics/tc554) (checked 2026-10-12)
- [IRS — Publication 15 (2026), Employer's Tax Guide](https://www.irs.gov/publications/p15) (checked 2026-10-12)

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Written by BRIX Editorial Team. Last updated 2026-10-12. General information, not tax, legal or financial advice.
Canonical: https://www.brix.so/learn/s-corp-vs-llc-for-contractors