The most significant tax difference between LLCs and S corporations is the treatment of self-employment taxes. In an LLC, each member’s share of profit is subject to self-employment tax.
In an S corporation, each shareholder’s share of profit is NOT subject to self-employment tax. The IRS does, however, require S corporations to pay shareholders who contribute substantial services a “reasonable” salary. This salary is subject to payroll taxes.
Similar to S corporations, LLCs (and partnerships) are considered “pass-through” entities where a business’s income and expenses flow through to the partners and are reported on the partners’ personal income tax returns.