Business Owner Tax Strategy: S Corp vs. LLC

The key distinction is Self-Employment (SE) Tax, which is 15.3% 
(12.4% Social Security + 2.9% Medicare). 

LLC (Default Tax Treatment) 
• All net profit is treated as earned income and fully subject to 15.3% SE tax 
• Reported on: 

• Schedule C (1040) 

• Schedule K‑1 (1065) 

For single and multiple members respectively  

LLC Electing S Corporation Status 

Income is divided into two parts: 

• Reasonable Salary– W-2 wages subject to payroll taxes (15.3%) 
  • Shareholder Distributions – Not subject to SE tax 

Distributions are reported on Schedule K‑1 from Form 1120‑S, then flow to Schedule E. 
They are subject to income tax and potentially the QBI deduction, but not SE tax.