S-Corp vs C-Corp comparison

Estimates only. This calculator uses simplified federal tax assumptions and doesn't account for state taxes, QBI deduction nuances, or your complete tax picture. A CPA or tax attorney calculates your exact numbers. See our full disclaimer.

S-Corp vs C-Corp tax comparison

Your business numbers

Expected annual net profit before owner pay ($)

Reasonable salary for your role ($/year, if S-Corp) What you'd pay someone else to do your job. This is required for S-Corp owner-employees.

% of profit you plan to reinvest (not distribute) Higher reinvestment reduces C-Corp's double-taxation disadvantage.

Your marginal personal income tax bracket (%)

Your estimated tax comparison

Get a business attorney and CPA consultation - free

A business attorney and CPA confirm the right election for your complete tax situation, handle the S-Corp election filing (Form 2553) if applicable, and ensure your reasonable salary determination will hold up under IRS scrutiny.

What's the fundamental tax difference between S-Corp and C-Corp?

A C-Corp pays corporate income tax on its profits (a flat 21% federal rate). If the corporation then distributes profit to shareholders as dividends, shareholders pay tax again on those dividends - "double taxation." Profit that's reinvested in the business rather than distributed avoids the second layer of tax, at least until it's eventually distributed.

An S-Corp is a pass-through entity for tax purposes - profit passes directly to shareholders' personal tax returns, taxed once at their individual rate, avoiding the corporate-level tax entirely. The key advantage specific to S-Corps for owner-employees: income can be split between a "reasonable salary" (subject to payroll/self-employment tax) and remaining profit distributions (not subject to self-employment tax), producing meaningful savings once profit is high enough.

If you haven't yet decided whether an LLC or corporation is the right starting entity, use the business entity selector first - S-Corp status is a tax election available to either an LLC or a corporation that qualifies.

When does a C-Corp make more sense despite double taxation?

Companies planning to raise venture capital or eventually go public are typically better served by C-Corp status regardless of the tax comparison, since investors strongly prefer this structure and S-Corps have ownership restrictions (100 shareholder limit, one class of stock, no non-U.S. or entity shareholders) that are incompatible with typical VC investment structures.

Companies planning significant reinvestment of profit rather than distribution to owners also reduce the practical impact of double taxation, since the second layer of tax only applies when profit is actually distributed as dividends. A C-Corp's flat 21% corporate rate can also be lower than an individual's marginal rate on pass-through income in some high-income scenarios, particularly when profit is retained rather than distributed.

What is the "reasonable salary" requirement and why does it matter so much?

The IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" for the services they actually perform before taking any remaining profit as a distribution. Setting the salary artificially low to maximize the tax-advantaged distribution portion is one of the most common and heavily scrutinized S-Corp compliance issues.

"Reasonable" is generally based on what an unrelated third party would be paid for comparable services, considering the industry, region, experience level, and time commitment. IRS audits and enforcement actions specifically target S-Corps with unusually low salary-to-distribution ratios relative to industry norms. Once you've settled on a structure, formalize governance with the corporate bylaws generator or LLC operating agreement builder depending on your underlying entity type.

Frequently asked questions

No - S-Corp election requires meeting specific IRS eligibility requirements: no more than 100 shareholders, all shareholders must be U.S. citizens or residents (not corporations, partnerships, or most trusts), only one class of stock is allowed (though voting rights can differ), and the entity must be a domestic corporation or LLC electing corporate tax treatment. If your business has outside investors who are venture capital funds, foreign investors, or other entities, S-Corp election is typically unavailable, which is one reason venture-backed startups almost always use C-Corp structure instead.

File IRS Form 2553, "Election by a Small Business Corporation," generally within 2 months and 15 days of the beginning of the tax year the election is to take effect (or at any time during the preceding tax year). All shareholders must consent to the election. Many states also require a separate state-level S-Corp election or recognize the federal election automatically - check your specific state's requirements. Missing the filing deadline can delay the election to the following tax year, so timing matters if you're trying to capture S-Corp tax treatment for a specific year.

The IRS can reclassify a portion of your distributions as wages, retroactively assessing payroll taxes (both employer and employee portions), interest, and potentially penalties. Courts have generally sided with the IRS in cases where salary was dramatically below industry norms for the actual work performed - some cases have resulted in years of back payroll taxes plus penalties. Document your reasonable salary determination (industry salary surveys, comparable job postings, or a formal compensation study) to support your position if ever questioned, and revisit the salary amount periodically as your business and role evolve.

Yes, in an important way - the QBI deduction (generally allowing a deduction of up to 20% of qualified pass-through business income) is calculated based on your pass-through income, which for an S-Corp is the distribution portion, not the salary portion. This creates an interesting interaction: lowering your salary increases pass-through income eligible for the QBI deduction, while the IRS requires that salary be "reasonable" - creating tension between 2 different tax optimization pressures that a CPA can help balance appropriately within legal bounds.

Yes, though with important restrictions and considerations. Revoking an S-Corp election to become a C-Corp is relatively straightforward with shareholder consent, but generally can't re-elect S-Corp status again for 5 years without IRS consent. Converting a C-Corp to S-Corp status is generally straightforward if eligibility requirements are met, though built-in gains tax can apply to appreciated assets if the corporation sells them within a specific period (typically 5 years) after the S-Corp election, a nuance that matters significantly for companies with substantial appreciated assets.