Why Does Taxation Differ Between an LLC and an S-Corp?

It’s no secret that two of the most common types of business structures are that of an LLC and S-Corp. While there are some similarities between the two, there are distinct differences as well. One of those main differences is the way that each is taxed. Here is how it breaks down.

How are S-Corps and LLCs Taxed?

No matter what type of business you run, you’ll be taxed on your net profit or loss, which is calculated by taking your overall sales minus any allowable deductible expenses. From there, here are the differences between the two:

  • S-Corp – S-Corps are usually structured where the owner gets paid a reasonable salary and then any leftover profit (excluding the salary) is filed in that owner’s personal tax return. For instance, if you were a 50% owner and you were paid $80,000 in salary and your company had a net profit of $50,000, you’d pay tax on half of that $50,000 plus the $80,000 salary in taxable business income.
  • LLC – Taxes for an LLC are paid on the individual tax return of the owner, based on their percentage of ownership. For instance, if you are a 50% owner and your company did $200,000 in net profit, you’d be responsible for $100,000 when filing your persona taxes.

Other Considerations

Generally, an S-Corp does pay more in tax than an LLC due in large part to applicable state corporate taxes and payroll taxes. This includes disability and unemployment tax, as well as minimum corporate tax fees (these vary by state). If you want a more detailed explanation about all of the differences between LLC and S-Corp businesses, this article from How To Start An LLC might give you all of the information you need.

Have Additional Questions?

When it comes to taxes and forming a business properly, you want to make sure you get it right. To get professional help, contact the IRS EIN Tax ID Filing Service at the IRS-EIN-Tax-ID website. They can assist you in applying for a federal tax id number, estate tax id number and much more.