Small business · Form 1120-S
The federal S corp tax rate is usually zero, because the owners are taxed on the profit.
An S corporation’s profit passes through to its shareholders, who pay tax on their share whether or not it is paid out. In 2026, their federal rates run from 10% to 37%.
Updated · Sources
S corporations, tax year 2026
- 0%
- is the federal income tax most S corps pay on their own profit.
- 15.3%
- is the Social Security and Medicare tax on an owner’s salary up to $184,500, split with the company. Above that, only the 2.9% Medicare part applies. No payroll tax is due on distributions.
- March 15
- is the usual Form 1120-S due date for a calendar year. The 2026 return is due March 15, 2027.
Can your LLC be taxed as an S corp?
An LLC or a corporation can be taxed as an S corp if it passes all five tests. To change an LLC to an S corp, you file one IRS form and keep the same company.
A US corporation or LLC
The business must be a domestic corporation, or an LLC that elects to be taxed as one. Both single-member and multi-member LLCs can elect. Banks that use the reserve method for bad debts, insurance companies and DISCs cannot.
No more than 100 shareholders
The company can have up to 100 shareholders, and a family counts as one. A family here means a common ancestor, descendants up to six generations down, and their spouses or former spouses.
Owners the rules allow
Every shareholder must be a US citizen or resident, an estate, or one of certain trusts and tax-exempt organizations. A partnership, a corporation or a nonresident alien cannot hold shares.
One class of stock
Every share must carry the same rights to distributions and liquidation proceeds, though voting rights can differ. In an LLC, the operating agreement must give every member’s interest the same rights.
A timely election to convert your LLC to an S corp
The company files Form 2553, and every shareholder must consent. It counts for a tax year if filed during the year before, or within 2 months and 15 days after that year starts. An existing calendar-year company has until March 15, and a later election counts from the next year unless the IRS grants relief.
An LLC that files Form 2553 needs no Form 8832, because electing S status also makes it a corporation for tax. The LLC is taxed as an S corp once the IRS accepts the election. Its S status starts on the date the election names and lasts while the election does.
On $150,000 of profit, an S election cuts federal tax by $7,031 at a $70,000 salary.
Whether your LLC should be taxed as an S corp depends on its profit and the salary you would take. The estimate here compares one owner’s federal tax with and without the election, at two salaries. The higher the salary, the smaller the saving.
Taxed as a sole proprietor
$37,607
Self-employment tax is $21,194, and income tax is $16,413.
S corp, $100,000 salary
$36,165
Payroll tax on the salary is $15,300, and income tax is $20,865. The saving is $1,442.
S corp, $70,000 salary
$30,576
Payroll tax on the salary is $10,710, and income tax is $19,866.
The owner takes the $16,100 standard deduction. Self-employment tax is 15.3% of 92.35% of the profit, and half of it is deductible. The profit stays under the Social Security wage base, so the full 15.3% applies. Payroll tax is 7.65% each for the owner and the company, which deducts its share. The qualified business income (QBI) deduction is 20% of the business profit, capped at 20% of taxable income before the deduction. For the S corp, that profit is counted after salary and the company’s half of payroll tax. For the sole proprietor, it is counted after half the self-employment tax. Taxable income stays under the $201,750 QBI threshold, so no wage limit applies. Income tax uses the 2026 brackets, with each line rounded to the dollar. State tax and the cost of running payroll, including federal unemployment tax, are left out. The salaries are examples only, and say nothing about what the IRS would call reasonable.
What changes on your returns when your LLC files as an S corp?
The election changes how the LLC is taxed, not what it is under state law. These are the changes for a one-owner LLC, which is taxed like a sole proprietorship until it elects.
| By default | As an S corp | |
|---|---|---|
| Federal return | Schedule C Part of your Form 1040 | Form 1120-S Your share then goes on your Form 1040 |
| Due date | April 15 With your Form 1040 | March 15 A month before your Form 1040 |
| Your pay | No salary The LLC cannot employ its owner | A reasonable salary Paid through payroll, with a W-2 |
| Tax on your work | Self-employment tax On the whole profit | Payroll tax On the salary alone |
| Payroll returns | None Unless the LLC has staff | Form 941 each quarter Or Form 944 if the IRS says so, plus Form 940 and W-2s each year |
A multi-member LLC files Form 1065 by default, due the same day as an S corp’s return. As an S corp, it files Form 1120-S instead, with a K-1 for each member.
Which S corp mistakes cost owners money?
Paying yourself too little salary
Take distributions with too little salary, and the IRS can treat them as wages, with payroll tax due. It weighs factors such as your duties and what comparable businesses pay for similar work. No IRS rule sets a ratio of salary to distributions.
Nothing is withheld from your share
Tax is withheld from your salary, but not from your share of the profit. You can cover it with quarterly estimated payments, or with extra withholding from your salary. By default, withholding counts as paid evenly through the year, so extra withholding late in the year still counts toward the earlier quarters.
Payouts and losses past your basis
If the company has no earnings left from C corporation years, its distributions are not dividends, so no dividend tax rate applies. Those distributions are tax-free up to your stock basis, and anything above it is taxed as gain. Losses are deductible only up to your stock basis plus your loans to the company, figured on Form 7203, and other limits can apply.
Gains from C corporation years
Built-in gains are the growth in a C corporation’s assets before it switched to S status. If the company sells those assets within five years of the switch, it can owe 21% on that growth.
Passive income on old C corporation earnings
An S corp that still holds earnings from C corporation years can owe 21% tax on passive investment income above 25% of its receipts. That income is mainly royalties, rents, dividends, interest and annuities. If passive income tops 25% three years in a row, the election ends.
Undoing the election
An LLC that revokes the election becomes a C corporation paying 21%, until a Form 8832 election changes its classification. Revoking needs consent from shareholders holding more than half the shares, and the revocation can set a future start date. Otherwise, a calendar-year company’s revocation made by March 15 takes effect that year, and one made later takes effect the next year.
Have a CPA check what an S corp saves you before you elect.
Valim’s CPAs advise LLC owners on the S corp election, then prepare and file the company’s Form 1120-S each year.
- We model your tax with and without an S election, and time the election if it saves you money.
- As part of that advice, we weigh your salary against the IRS’s reasonable compensation factors, and plan your distributions around it.
- We prepare Form 1120-S, each shareholder’s K-1 and your state returns from your bookkeeper’s year-end books.
- We size the estimated payments or extra withholding that cover the tax on your K-1.
- We handle any IRS or state notice on a return we prepared, and the work is part of your fee.
- Individual return
- from $195
- Business return
- from $495
We quote a flat fee before work starts. We do not bill hourly.
S corp tax questions.
How much tax does an S corp pay?
Most S corps pay no federal income tax of their own, while a C corporation pays 21% on its profit. An S corp is a pass-through entity, so its shareholders pay tax on its profit at their own 2026 rates of 10% to 37%. The company does pay its half of Social Security and Medicare tax on owners’ salaries. A former C corporation can owe 21% on built-in gains too. In California, most S corporations pay 1.5% of net income, with an $800 minimum.
What are the tax advantages of an S corp?
An S corp’s main tax advantage is lower payroll tax for an owner who works in the business. Only the salary owes Social Security and Medicare tax, so profit above a reasonable salary owes none. The main disadvantages are payroll costs, extra tax in some states and, for a one-owner LLC, a return of its own. The salary also earns no 20% qualified business income (QBI) deduction, though the rest of the profit can. An S corp beats a sole proprietorship or default LLC only when the payroll tax it saves exceeds these costs.
What is the 5-year rule for S corps?
The 5-year rule stops a corporation whose S election was revoked or terminated from electing again right away. It must wait until its fifth tax year after the termination takes effect, unless the IRS consents. The IRS tends to consent when new owners hold more than half the stock. A second 5-year rule applies to a former C corporation. For its first five years as an S corp, it can owe 21% on built-in gains it recognizes, such as by selling assets.
Does an S corp need to file a tax return?
Yes, every S corp files Form 1120-S for each year its election is in effect, whatever its income. It is due on the 15th day of the third month after the tax year ends. A calendar-year 2026 return is due March 15, 2027, and Form 7004 extends the filing deadline to September 15, 2027. For a return due in 2027, filing late costs $260 per shareholder for each month or part of one, up to 12 months. The penalty applies even with no tax due, unless the delay had reasonable cause.
Can an S corp own 100% of an LLC?
Yes, an S corp can own 100% of an LLC, and by default that LLC is a disregarded entity. The S corp reports the LLC’s income and expenses on its own Form 1120-S, as a division of its business. The LLC still counts as a separate employer for payroll taxes. An S corp can also own all of another corporation, and treat it as a qualified subchapter S subsidiary (QSub). It makes that election on Form 8869.
Sources
- 26 U.S.C. § 1361, S corporation defined
- 26 U.S.C. § 1362, Election; revocation; termination
- 26 U.S.C. § 1363, Effect of election on corporation
- 26 U.S.C. § 1366, Pass-thru of items to shareholders
- 26 U.S.C. § 1368, Distributions
- 26 U.S.C. § 1374, Tax imposed on certain built-in gains
- 26 U.S.C. § 1375, Tax on passive investment income above 25% of gross receipts
- 26 U.S.C. § 199A, Qualified business income
- 26 U.S.C. § 6654, Failure by individual to pay estimated income tax
- 26 U.S.C. § 6699, Failure to file S corporation return
- 26 C.F.R. § 1.1361-1, S corporation defined
- 26 C.F.R. § 1.1362-5, Election after termination
- 26 C.F.R. § 301.7701-2, Business entities; definitions
- 26 C.F.R. § 301.7701-3, Classification of certain business entities
- IRS, Instructions for Form 2553
- IRS, Instructions for Form 1120-S (2025)
- IRS, Instructions for Form 7203
- IRS, About Form 8869, Qualified Subchapter S Subsidiary Election
- IRS, S corporation compensation and medical insurance issues
- IRS, Schedule SE (Form 1040) (2025), Self-Employment Tax
- IRS, Publication 15 (2026), Employer’s Tax Guide
- IRS, Rev. Proc. 2025-32 (2026 inflation adjustments)
- SSA, Contribution and benefit base
- Cal. Rev. & Tax. Code § 23802, S corporations
Reviewed and updated September 2026. General information, not advice for your situation.