Choosing between a C-Corporation and an S-Corporation is one of the most significant tax decisions a business owner can make. The right choice can save you tens of thousands of dollars annually, while the wrong one can lead to "double taxation" or IRS scrutiny.
This calculator helps you compare the estimated total tax liability for both entities, factoring in the corporate rate, shareholder dividend taxes, self-employment taxes, and the QBI deduction.
C-Corp vs. S-Corp: The Core Difference
The primary difference lies in how income is taxed.
C-Corporation
Tax Entity: Separate Entity
The corporation pays income tax on its profits at the corporate rate (currently flat 21%). Then, if profits are distributed to shareholders as dividends, the shareholders pay tax again on their personal returns. This is known as Double Taxation.
S-Corporation
Tax Entity: Pass-Through Entity
The corporation pays $0 income tax. Instead, profits (and losses) "pass through" to the owners' personal tax returns. Owners pay income tax at their individual rates. This avoids double taxation but comes with strict ownership rules.
The "Double Taxation" Problem Explained
Let's assume a C-Corp earns $100,000 in profit and wants to distribute it all to the owner.
- Corporate Level: The corporation pays 21% tax ($21,000). Remaining cash: $79,000.
- Shareholder Level: The owner receives a $79,000 dividend. This is taxed at the dividend tax rate (usually 15% or 20%). Assuming 15%, that's another $11,850.
- Total Tax: $21,000 + $11,850 = $32,850.
- Effective Rate: 32.85%.
If this was an S-Corp, the $100,000 would simply flow to the owner's return and be taxed once at their marginal rate. If their rate is 24%, they save nearly $9,000.
The S-Corp "Reasonable Salary" Advantage
The biggest tax loophole for S-Corps is the ability to save on Self-Employment Taxes (Social Security and Medicare), which total 15.3%.
In a Sole Proprietorship or LLC, all profit is subject to this 15.3% tax. In an S-Corp, you can split your income into:
- Salary (W-2): Subject to 15.3% payroll tax.
- Distribution (K-1): Exempt from 15.3% payroll tax.
The Rule: You must pay yourself a "Reasonable Salary" for the work you do. You cannot pay yourself $0 salary and take $100k in distributions to avoid all payroll taxes. That is tax fraud. But if you pay yourself a fair market wage (e.g., $60k) and take the rest ($40k) as distributions, you save 15.3% on that $40k. That's a $6,120 savings instantly.
The QBI Deduction (Section 199A)
Introduced in the Tax Cuts and Jobs Act of 2017, the Qualified Business Income (QBI) Deduction allows eligible pass-through business owners (S-Corps, LLCs, Sole Props) to deduct up to 20% of their business income from their taxes.
Example:
If you have $100,000 in collaborative S-Corp income, you might only be taxed on $80,000. At a 24% tax rate, this deduction saves you $4,800.
Note: C-Corps are not eligible for the QBI deduction. This is a massive advantage for S-Corps. However, the deduction phases out for high-income earners in "Specified Service Trades or Business" (SSTB) fields like law, health, and consulting.
State-Specific Considerations
The Federal rate is one thing, but State taxes can change the math entirely. Some states treat S-Corps and C-Corps differently.
Tax-Friendly States
States like Texas, Florida, Nevada, and Wyoming have no state corporate income tax and no personal income tax. In these states, the S-Corp vs C-Corp analysis is purely federal.
High-Tax States
California levies a 1.5% tax on S-Corp net income (min $800) but an 8.84% tax on C-Corps.
New York City does not recognize S-Corps at all, taxing them as C-Corps (8.85%), creating a unique localized double-taxation trap.
Always consult a CPA familiar with your specific state nexus. For example, Tennessee imposes franchise and excise taxes that can be substantial for both entity types.
When a C-Corp Makes Sense
Despite the double taxation, C-Corps are still the right choice for certain businesses:
- Venture Capital: Investors almost always require a Delaware C-Corp. They cannot invest in S-Corps because S-Corps are limited to 100 shareholders and cannot have entity shareholders (like VC funds).
- Reinvesting Profits: If you plan to keep all money IN the business to grow, you don't pay the second layer of dividend tax. You only pay the 21% flat rate, which might be lower than your personal income tax rate (which can go up to 37%).
- Fringe Benefits: C-Corps can deduct the cost of employee benefits (health, disability) tax-free, whereas S-Corp owners earning >2% of stock must count some benefits as taxable income.
- Section 1202 (QSBS): Qualified Small Business Stock allows C-Corp founders to exclude up to 100% of capital gains from federal tax upon exit (up to $10M) if held for 5 years. This benefit is NOT available to S-Corps.
The Future of Corporate Tax Rates
Tax laws are not static. The Tax Cuts and Jobs Act (TCJA) of 2017 set the C-Corp rate permanently at 21%. However, the individual tax cuts (that benefit S-Corps) and the QBI deduction are set to sunset (expire) after 2025.
If Congress does not extend them:
- Individual rates will revert to higher pre-2018 levels.
- The 20% QBI deduction will disappear.
This potential change creates a "fiscal cliff" where S-Corps might suddenly become less attractive compared to the permanent 21% C-Corp rate. Long-term planning requires keeping an eye on legislative proposals.
Entity Conversion: Things to Consider
Switching from a C-Corp to an S-Corp (or vice versa) requires careful planning. Here are the most critical considerations when contemplating a conversion.
- Timing Deadlines: S-Corp election via Form 2553 must be filed within 75 days of the start of the tax year. Missing this deadline means waiting another full year.
- Accumulated Earnings: C-Corps that have retained earnings and elect S-Corp status create "Accumulated Adjustments Account" complexities that require careful tracking to avoid double taxation on future distributions.
- Built-in Gains Tax: If a C-Corp with appreciated assets converts to S-Corp, the company may owe "Built-in Gains" tax (currently 21%) if those assets are sold within 5 years of conversion.
- LIFO Recapture: Companies using LIFO inventory must recapture the LIFO reserve when converting to S-Corp, creating an immediate tax hit.
- Passive Investment Income: S-Corps with excessive passive investment income (more than 25% of gross receipts) and C-Corp accumulated earnings can trigger penalty taxes or even lose their S-Corp election.
Tax Planning Strategies for Corporations
Regardless of your entity type, proactive tax planning can significantly reduce your effective tax rate. Here are strategies applicable to both C-Corps and S-Corps.
Retirement Plan Contributions
Both entity types can establish qualified retirement plans (401(k), SEP-IRA, SIMPLE IRA, or defined benefit plans) that provide significant tax deductions. A solo 401(k) allows owner-employees to contribute up to $69,000 annually (2024 limits), reducing taxable income dollar-for-dollar.
Bonus Depreciation and Section 179
The current tax code allows 60% bonus depreciation (2024) on qualifying property placed in service. This enables businesses to immediately expense equipment purchases rather than depreciating them over years. Combined with Section 179, businesses can write off substantial capital investments in the year of purchase.
Income Timing Strategies
Accelerating deductions into the current year or deferring income to the next year can optimize your tax position. For S-Corps, this is particularly valuable when paired with the QBI deduction phase-out thresholds. Cash-basis taxpayers have significant flexibility in timing invoice payments and receivable collections.
Frequently Asked Questions
Conclusion
There is no clear winner for everyone. If you are a lifestyle business, consultant, or agency earning over $80k net profit, the S-Corp usually wins due to self-employment tax savings and QBI.
If you are a high-growth startup seeking venture capital or planning a massive exit in 5+ years (utilizing QSBS), the C-Corp is the industry standard.
Use our calculator to run the immediate numbers, but always discuss the long-term strategy with a qualified tax professional.
Check out our EBITDA Calculator to measure your core profitability, or the Cash Flow Calculator to manage your liquidity.