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LLC vs. S-Corp for 1099 Contractors

LLC vs. S-Corp for 1099 contractors: taxes, payroll, retirement, and admin compared side by side, plus an illustrative break-even and Illinois notes.

As of 2026-09-24 · By Alpha Kamara

Short answer: An LLC is a legal entity you form under state law. An S-Corp is a tax election an LLC can make. By default, a single-member LLC pays 15.3% self-employment tax on nearly all its profit. As an S-Corp, you pay payroll tax only on a reasonable salary, but you add payroll, a separate return, and sometimes state entity taxes.

So the real question for most contractors isn't "LLC or S-Corp?" It's "Should my LLC keep its default tax treatment, or elect to be taxed as an S-Corp?" This guide compares the two side by side, walks through an illustrative break-even, and covers state issues, including Illinois. Federal figures come from the IRS and SSA. Illinois figures come from the Illinois Department of Revenue (links in Sources).

Side-by-side comparison

Single-member LLC (default: disregarded, taxed like a sole proprietorship) LLC taxed as an S-Corp
What it is State-law entity. Disregarded for federal income tax unless it elects otherwise Same LLC, plus an S-Corp tax election on Form 2553
Federal income tax return Schedule C on your Form 1040 Form 1120-S, plus a Schedule K-1 to you
Social Security and Medicare 15.3% SE tax on 92.35% of net profit (Social Security part capped at $184,500 for 2026) 15.3% FICA on W-2 salary only. Distributions aren't subject to employment taxes
How you pay yourself Owner draws Reasonable W-2 salary through payroll, plus distributions
Payroll filings None for you Forms 941 and 940, W-2, and state withholding and unemployment filings
Solo 401(k) employer contribution About 20% of net SE earnings after half of SE tax Up to 25% of W-2 wages
QBI (Section 199A) deduction Based on net business profit Based on profit after salary. Reasonable compensation isn't QBI
Health insurance (owner) Self-employed health insurance deduction if eligible Premiums go on W-2 (Box 1 only) for a more-than-2% shareholder, then the deduction if eligible
Unemployment benefits (owner) Usually can't collect unemployment, because you're self-employed, not an employee Owners generally can't collect unemployment benefits (unemployment insurance), even with a W-2 salary. Rules vary by state
Illinois entity-level tax No separate Illinois return. Income goes on your IL-1040 Form IL-1120-ST. 1.5% replacement tax on net income
Added cost and effort Lowest Payroll service, 1120-S preparation, more bookkeeping discipline

For employment tax purposes, the IRS treats a single-member LLC as a separate entity. It uses its own name and EIN when it has employees, even while it's disregarded for income tax.

How the savings work

Default LLC: SE tax ≈ net profit × 92.35% × 15.3%.

S-Corp: payroll tax ≈ salary × 15.3%, plus unemployment taxes. The profit above your salary isn't subject to employment taxes.

The gap between those two numbers is the gross savings. From that, subtract the extra costs: payroll service, 1120-S preparation, state entity taxes, and your time. What's left is the net benefit. Income tax effects also move the result a bit. For example, the S-Corp deducts its half of FICA while a sole proprietor deducts half of SE tax, and a salary lowers your QBI deduction. Your CPA should model those.

The biggest variable is your reasonable salary. The IRS requires S-Corps to pay reasonable compensation for the owner's services before taking distributions, and it doesn't publish a percentage. The higher your defensible salary relative to profit, the smaller the savings. See our S-Corp election guide for the IRS factors.

Illustrative break-even

Illustrative only. Not a recommendation. These hypothetical figures hold salary at $60,000 across all profit levels so the math is easy to follow. In real life, reasonable compensation depends on your work, and it often rises with revenue. The table includes Social Security, Medicare, federal unemployment tax, one payroll service price, and the Illinois replacement tax. It leaves out income tax effects, state unemployment tax, and CPA fees for Form 1120-S, which vary widely. Use it to see the shape of the tradeoff, not to decide.

Assumptions (hypothetical, 2026): an Illinois-based single owner, no other W-2 wages, a $60,000 S-Corp salary, FUTA at the 0.6% net rate on $7,000 ($42), and an assumed payroll service cost of $504/year for one worker (actual pricing varies by provider).

Net profit before owner salary Default LLC: SE tax S-Corp: FICA on $60,000 + FUTA Difference After payroll service (−$504) Illinois replacement tax (1.5%)* Net, before CPA fees and income tax effects
$70,000 $9,891 $9,222 $669 $165 −$73 about $92
$90,000 $12,717 $9,222 $3,495 $2,991 −$373 about $2,618
$120,000 $16,955 $9,222 $7,733 $7,229 −$823 about $6,407
$150,000 $21,194 $9,222 $11,972 $11,468 −$1,273 about $10,195

*1.5% × (profit − $60,000 salary − $4,590 employer FICA − $42 FUTA − $504 payroll). Illinois base income can differ after state adjustments. Outside Illinois, replace this column with your state's rules (it may be $0).

How to read it: in this example, at $70,000 of profit, the S-Corp's gross savings are basically used up before CPA fees, so staying a default LLC likely wins. By $90,000, a few thousand dollars remain to cover the 1120-S fee and extra work. Your break-even is the profit level where the last column equals your CPA's added fee for the S-Corp return plus any other costs this table leaves out. If your reasonable salary would be higher than $60,000, the break-even moves up.

State notes

State rules vary a lot, so this section stays general. Check with your CPA for your state.

  • Some states tax S-Corps at the entity level or charge annual fees or minimum taxes. Others follow the federal pass-through treatment with no entity tax. A few may treat S-Corps differently from the federal rules.
  • Payroll brings state registrations: state income tax withholding (where applicable) and a state unemployment insurance account.
  • Annual LLC reports and fees apply either way, because they come from your state's LLC law, not the tax election.

Illinois specifics

  • Replacement tax: Illinois charges S-Corps and partnerships a 1.5% personal property replacement tax on net income. Corporations other than S-Corps pay 2.5% (Illinois Department of Revenue).
  • Returns: An LLC taxed as an S-Corp files Form IL-1120-ST. A disregarded single-member LLC has no separate Illinois income tax filing. Its income goes on the owner's IL-1040 (Illinois DOR Q&A).
  • Individual income tax and withholding: 4.95% of net income (Illinois DOR).
  • Pass-through entity (PTE) tax election: Illinois offers an elective PTE tax at 4.95% for partnerships and S-Corps, made annually on the entity's replacement tax return (Illinois DOR Publication 129). Whether it helps depends on your federal itemized-deduction picture. Ask your CPA whether it's available and worthwhile for your tax year.

When each one tends to fit

A default LLC often fits when:

  • Profit is modest or uneven.
  • A reasonable salary would take most of the profit.
  • You don't want to run payroll.
  • You're testing a new business line.

An LLC taxed as an S-Corp often fits when:

  • Profit is steady and well above a reasonable salary for your work.
  • You'll run payroll on schedule and keep clean books.
  • You want a larger Solo 401(k) employer contribution based on W-2 wages.

For how the retirement side changes, see our Solo 401(k) contribution limits guide and Solo 401(k) vs. SEP-IRA. For the SE tax mechanics, see how to reduce self-employment tax.

Frequently asked questions

Is an S-Corp better than an LLC for a 1099 contractor?

It depends on profit, reasonable salary, and costs. An S-Corp can cut Social Security and Medicare tax on profit above a reasonable salary. It also adds payroll, a Form 1120-S, and sometimes state entity taxes. At lower or uneven profit levels, the default LLC is often simpler and costs about the same or less.

Can an LLC be taxed as an S-Corp?

Yes. An eligible LLC can file Form 2553 to be taxed as an S-Corp. The IRS says an eligible entity that timely files Form 2553 is treated as a corporation as of the effective date and doesn't need to file Form 8832 separately. The LLC stays an LLC under state law.

At what income does an S-Corp make sense?

There's no IRS threshold. The break-even is where the Social Security and Medicare tax you save on profit above your reasonable salary is more than the added costs: payroll, the 1120-S fee, and state taxes. In our illustrative Illinois example with a $60,000 salary, the net benefit was close to zero at $70,000 of profit and a few thousand dollars at $90,000.

Does a single-member LLC pay self-employment tax?

Yes, by default. A single-member LLC is disregarded for federal income tax, so its net profit goes on Schedule C and is subject to self-employment tax on Schedule SE, generally if net SE earnings are $400 or more.

What is the Illinois replacement tax for S-Corps?

The Illinois personal property replacement tax is 1.5% of net income for S corporations and partnerships, and 2.5% for other corporations, per the Illinois Department of Revenue. A disregarded single-member LLC has no separate Illinois filing. The owner reports its income on the IL-1040.

Does electing S-Corp status change my liability protection?

No. Liability protection comes from forming the LLC under state law. The S-Corp election only changes federal tax treatment (and state tax treatment where the state follows it). Talk to an attorney about liability questions.

How does an S-Corp affect my Solo 401(k)?

As an S-Corp, the employer contribution is up to 25% of your W-2 wages. Distributions don't count. As a default LLC, it's about 20% of net SE earnings after half of SE tax. For 2026, employee deferrals of up to $24,500 are available either way, subject to the $72,000 total limit.

Does an S-Corp salary reduce the QBI deduction?

It can. The IRS says reasonable compensation paid by an S-Corp is not qualified business income. Your salary comes out of the profit that counts toward the Section 199A deduction. Other limits also apply, so have your CPA model it.

Compare your own numbers

Use the free IndieVaults tax savings calculator to compare a default LLC with an S-Corp at your profit level. Or book a free tax analysis, and we'll build the comparison with your existing accountant, including your state. You can also reach us at hello@indievaults.com or (773) 617-5359.

Related guides

Sources

Disclaimer

This guide is for general educational purposes only and is not tax, legal, or investment advice. The break-even table is hypothetical and illustrative. It leaves out income tax effects, state unemployment tax, and professional fees, and it holds salary constant for simplicity. Figures are as of the date modified above and can change. State rules vary; the Illinois notes are general. Before you elect S-Corp status or change your structure, check with your CPA or tax advisor (and an attorney for legal questions). IndieVaults works alongside your existing accountant and doesn't replace one.

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