LLC vs S-Corp vs C-Corp Tax Comparison Calculator

Understanding Business Entity Tax Structures

Three Main Entity Types

1. LLC (Limited Liability Company) - Pass-Through Taxation

An LLC is a flexible entity that can be taxed as a partnership (multiple owners) or sole proprietorship (single owner). All business income "passes through" to owner tax returns.

Tax calculation:

• Business income taxed at owner's individual tax rate (10%-37%)
• Self-employment tax of 15.3% on all net income (except in certain cases)
• State income tax (varies by state)
• No corporate-level tax

Advantages:

• Simple tax filing (Schedule C on personal tax return)
• Flexibility in ownership structure
• Pass-through taxation avoids double taxation
• Easy to establish and maintain

Disadvantages:

• All income subject to self-employment tax (15.3%)
• Higher overall tax burden for profitable businesses
• Owner personally liable for business debts (though LLC provides liability protection)

2. S-Corp (S-Corporation) - Hybrid Structure

An S-Corp is a regular corporation electing to be taxed under Subchapter S. Income passes through to owners but is split between salary (subject to payroll tax) and distributions (not subject to self-employment tax).

Key requirement: Owner must take a "reasonable salary" based on industry standards. The IRS can challenge unreasonably low salaries.

Advantages:

• Significant self-employment tax savings (distributions avoid 15.3% tax)
• Pass-through taxation (no corporate tax)
• Limited liability for owners

Disadvantages:

• More complex tax compliance (Form 1120-S required)
• Payroll processing and FICA taxes required
• Annual filing fees ($100-$500)
• Strict ownership restrictions (domestic shareholders only)
• Requires "reasonable salary" determination

3. C-Corp (C-Corporation) - Corporate Structure

A C-Corp is a traditional corporation that pays corporate income tax on profits. Remaining earnings can be distributed to shareholders as dividends (subject to additional individual tax).

Advantages:

• Limited liability for shareholders
• Ability to retain earnings and defer distribution
• Can offer stock options to employees
• Separate legal entity from owners

Disadvantages:

• Double taxation (corporate + individual dividend tax)
• More complex setup and ongoing compliance
• Higher accounting costs
• Corporate formalities required (board meetings, minutes)

Detailed Tax Comparison Table

Worked Example: Software Developer Business

Scenario: Alex is a self-employed software developer earning $150,000 gross revenue with $40,000 in expenses, leaving $110,000 net business income. Alex is in the 24% federal tax bracket with 6% state income tax.

Option 1: LLC (Pass-through)

• Taxable Income: $110,000
• Federal Income Tax: $110,000 × 24% = $26,400
• Self-Employment Tax: $110,000 × 15.3% = $16,830
• State Income Tax: $110,000 × 6% = $6,600
• Total Tax: $49,830
• After-Tax Income: $110,000 − $49,830 = $60,170

Option 2: S-Corp (with $75,000 salary)

• W-2 Salary: $75,000
• S-Corp Distribution: $110,000 − $75,000 = $35,000
• Payroll Tax on $75,000 salary: $11,475
• Federal Income Tax on $110,000: $110,000 × 24% = $26,400
• State Income Tax: $110,000 × 6% = $6,600
• S-Corp Filing Fee: $100
• Total Tax: $44,575
• After-Tax Income: $110,000 − $44,575 = $65,425
• Savings vs LLC: $5,255/year (10.5% savings)

Option 3: C-Corp

• Corporate Federal Tax: $110,000 × 21% = $23,100
• Corporate State Tax: $110,000 × 6% = $6,600
• Remaining for Distribution: $110,000 − $29,700 = $80,300
• Dividend Tax on $80,300: $80,300 × 15% (long-term capital gains rate) = $12,045
• Total Tax: $41,745
• After-Tax Income: $110,000 − $41,745 = $68,255
• Savings vs LLC: $8,085/year (16.2% savings)

However, C-Corp becomes disadvantageous if Alex needs to withdraw funds annually. If distributions are $110,000, the double taxation applies fully.

When to Choose Each Structure

• LLC: Best for service businesses, freelancers, and new ventures where income is variable and distributions are frequent.
• S-Corp: Ideal for profitable businesses ($80K+ net income) where owners need regular distributions. Requires reasonable salary determination.
• C-Corp: Best for businesses that will retain earnings for growth/reinvestment, or for venture-backed startups planning exit.

Important Considerations & Limitations

• Reasonable Salary (S-Corp): The IRS watches for unreasonably low salaries. Typical minimum is 60% of net income.
• State Taxes: This calculator uses federal rates. State taxes vary; some states (Texas, Florida, Wyoming) have no income tax.
• Medicare Surtax: High-income individuals pay additional 3.8% net investment income tax on distributions (not calculated here).
• Estimated Tax Payments: All structures require quarterly estimated tax payments; failure incurs penalties.
• Double Taxation Relief: Section 1231 assets and qualified business income deduction (QBI) can reduce C-Corp disadvantage in some cases.
• Conversion Costs: Converting from LLC to S-Corp or vice versa has setup costs and potential tax consequences.
• Employee Payroll: S-Corps with employees have additional payroll compliance obligations.
• Filing Deadlines: Different entity types have different tax return deadlines (partnerships March 15, C-Corps Sept 15).
• State Franchise Tax: Some states charge annual franchise/privilege taxes on corporations regardless of profit.
• Complexity vs Savings: S-Corp savings may not justify costs for businesses with modest income ($30K-$50K).