US Small Business Tax 2026: LLC vs S-Corp vs C-Corp, and the Permanent QBI Deduction
Choosing a business entity in the US is really choosing a tax regime β and in 2026 the biggest planning variable just changed: the 20% qualified business income (QBI) deduction, once scheduled to die at the end of 2025, is now permanent. This guide compares the four common structures, explains exactly how the S-corporation saves self-employment tax, and covers the 2026 QBI rules after the One Big Beautiful Bill Act.
The four structures at a glance
| Sole proprietorship / single-member LLC | Partnership / multi-member LLC | S-corporation | C-corporation | |
|---|---|---|---|---|
| Taxed as | Disregarded β Schedule C on your 1040 | Pass-through β Form 1065, K-1s | Pass-through β Form 1120-S, K-1s | Separate taxpayer β Form 1120 |
| Federal income tax | Your personal brackets (10β37%) | Your personal brackets | Your personal brackets | Flat 21% |
| Self-employment / payroll tax | 15.3% SE tax on net earnings | 15.3% SE tax (general partners) | FICA only on salary; distributions exempt | FICA only on salary; dividends taxed twice |
| QBI 199A eligible | Yes | Yes | Yes (on pass-through profit) | No |
| Best for | Simple freelancers, testing ideas | Multi-owner service firms | Profitable owner-operators | Venture-funded startups, retained earnings |
The LLC itself is not a tax classification β a single-member LLC defaults to sole-proprietorship treatment and a multi-member LLC to partnership treatment. The S-corporation is a tax election (Form 2553) an LLC or corporation can make.
How the S-corp saves self-employment tax
A sole proprietor pays 15.3% self-employment tax β 12.4% Social Security (on the first $184,500 of 2026 net earnings) plus 2.9% Medicare (no cap), with an extra 0.9% Medicare above $200,000/$250,000 β on essentially every dollar of profit.
An S-corporation splits your income into two streams: a salary (subject to the same 15.3% FICA, split between you and the company) and distributions of remaining profit, which are not subject to payroll tax at all. Worked example β $150,000 of profit:
- Sole proprietor: SE tax β 150,000 Γ 92.35% Γ 15.3% β $21,200
- S-corp with $80,000 salary: FICA on salary β $12,240; $70,000 distribution β $0 payroll tax
- Saving β $9,000/year, minus S-corp costs (payroll service, extra tax return: typically $1,500β$3,000)
The catch is the reasonable salary requirement: the IRS requires S-corp owner-employees to take "reasonable compensation" for their work, judged on duties, hours, and comparable market pay. A $0 salary with large distributions is the classic audit trigger β the IRS can recharacterise distributions as wages plus penalties.
One more wrinkle: electing S-corp status shrinks your QBI, because salary is not qualified business income. At high incomes the SE-tax saving and the smaller 199A deduction pull in opposite directions β model both before electing.
QBI 199A in 2026: permanent, with a new $400 floor
Section 199A lets eligible pass-through owners deduct up to 20% of qualified business income. Under prior law it was scheduled to sunset after 2025; the One Big Beautiful Bill Act (P.L. 119-21, signed 4 July 2025), section 70105, made it permanent for tax years beginning after 31 December 2025. The 2026 rules:
| Element | 2026 rule |
|---|---|
| Deduction rate | 20% of QBI (unchanged) |
| Sunset | None β permanent |
| Full deduction below | $201,750 single / $403,500 joint taxable income (Rev. Proc. 2025-32) |
| Phase-in range (W-2 wage/capital limit) | $75,000 single / $150,000 joint (widened from $50K/$100K) |
| Deduction fully phased out (SSTBs) | $276,750 single / $553,500 joint |
| New minimum deduction (Β§199A(i)) | $400 if you have at least $1,000 of QBI from an active business you materially participate in (indexed after 2026) |
Specified service trades or businesses (SSTBs β law, medicine, consulting, finance, and similar) still phase out completely above the thresholds; non-SSTBs phase down to a limit based on W-2 wages paid and capital invested. The $400 floor is new for 2026 and helps the smallest side businesses that previously got only a token deduction.
When the C-corp wins
The 21% flat federal rate (plus state tax) beats pass-through treatment when you plan to retain and reinvest profits rather than distribute them β the classic venture-backed startup pattern. Downsides: double taxation on dividends, no QBI deduction, and more formalities. For most owner-operated small businesses distributing profits annually, pass-through plus the 20% QBI deduction usually wins.
There is one more C-corp-only perk worth knowing: qualified small business stock (QSBS). If you hold C-corp shares from formation for more than five years and the company stays under $50 million in gross assets, up to $10 million of gain per issuer can be excluded from federal tax on sale (section 1202) β a benefit no pass-through can replicate. Founders expecting a large exit sometimes choose C-corp from day one for this reason alone, accepting the higher annual tax drag in exchange for a potentially tax-free sale years later.
Next steps
- Start simple: a sole proprietorship or single-member LLC costs almost nothing; you can elect S-corp treatment later via Form 2553 when profits justify it (roughly $60Kβ$80K+ of consistent profit is the common crossover).
- Set a defensible salary the day you elect S-corp status β document comparable pay so the number survives scrutiny.
- Model QBI both ways: below $201,750/$403,500 of taxable income you generally get the full 20%; above it, run the wage-limit and SSTB math before assuming the deduction.
- Do not forget state tax: entity choice interacts with state rules (some states tax S-corps or LLCs differently, and a few offer pass-through-entity SALT-cap workarounds) β confirm your state's treatment.
- Calendar it: S-corp elections for 2026 generally had to be filed by 15 March 2026 (with limited late-election relief); payroll must run all year for the salary to count.