C Corp vs S Corp: How Each One Is Taxed (2026)

TL;DR: A C corp and an S corp are the same legal entity under two tax elections. A C corporation pays its own federal tax at a flat 21%, then its shareholders pay again on dividends, so distributed profit is taxed twice. An S corporation pays no income tax of its own: profit flows to the owners' returns and is taxed once. On $100,000 taken out the same year, the C corp route costs about $32,850; the single S corp layer is usually less.

Most search results for this question list the legal traits of each structure and stop. The tax question has a checkable answer, so this guide runs one business's profit through both. Whichever you pick, the tax lands on net profit, and keeping that figure accurate with an expense tracker that captures every deductible cost is what shrinks the number these taxes are calculated on.

What Is the Difference Between a C Corp and an S Corp?

Both are corporations formed under state law, and both give the owners limited liability. "C corp" and "S corp" are not two legal structures but two ways the IRS can tax the same corporation, named after the subchapters of the tax code that govern them.

By default, a corporation is a C corporation. The IRS treats it as "a separate taxpaying entity" that files its own return and pays its own tax. A corporation becomes an S corporation only by electing that status on Form 2553, the election under section 1362(a). The election flips the tax treatment from a separate taxpayer to a pass-through, but the corporation, its shares, and its liability shield stay exactly the same.

An LLC can ask to be taxed as either a C or an S corporation, so the choice below applies to incorporated LLCs too. Our sole proprietor vs LLC taxes guide covers the LLC default; this one covers the corporate elections on top of it.

How a C Corporation Is Taxed

A C corporation figures its taxable income, then, per IRS Publication 542, pays tax by "multiplying taxable income by 21% (0.21)." That 21% is a flat rate set by the 2017 tax law and still in force for 2026.

The second layer arrives when the money leaves the company. The corporation gets no deduction for the dividends it pays, so after-tax profit is taxed again in the shareholder's hands. The IRS says distributing earned profit as dividends "creates a double tax." Those dividends, when qualified, are "taxed at lower capital gain rates," which for 2026 run 0%, 15%, or 20% by the shareholder's taxable income.

Two more C-corp rules matter for the choice:

• Losses stay in the company. Shareholders "cannot deduct any loss of the corporation," so an early-stage loss cannot offset the owner's other income the way a pass-through loss can.
• Hoarding cash has a limit. A C corporation that retains earnings "beyond its reasonable business needs" can owe the accumulated earnings tax, which Publication 542 describes as a charge on profits kept to let "individual shareholders avoid income tax."

How an S Corporation Is Taxed

An S corporation files Form 1120-S but pays no federal income tax of its own in the ordinary case. Instead it reports each owner's share of profit on a Schedule K-1, and the owners carry that figure to their personal 1040 through Schedule E. The profit is taxed once, at the owner's individual rate, whether or not any cash was distributed. Our Schedule K-1 guide walks the boxes.

Two features pull the single layer lower:

• The QBI deduction. Owners of an S corporation can claim the qualified business income deduction, worth "up to 20 percent" of qualified business income. Income earned "through a C corporation" does not qualify, so this 20% break is a pass-through advantage the C corp does not get. The Section 199A deduction was made permanent in the 2025 tax law.
• Distributions above a salary. An owner who works in the business must take reasonable compensation as wages, which carry Social Security and Medicare tax. Profit paid out above that salary is a distribution that escapes those payroll taxes. The IRS warns it "has the authority to reclassify" an artificially low salary back into wages, so this works only with a defensible number. The reasonable salary rules and the self-employment tax math each have their own guide.

The catch is eligibility. An S corporation must be a domestic corporation with "no more than 100 shareholders," only "one class of stock," and shareholders who are individuals, certain trusts, or estates. It "may not" have "partnerships, corporations or non-resident alien shareholders." Those limits rule out most outside investment, where the C corporation earns its keep.

C Corp vs S Corp: The Same $100,000, Taxed Two Ways

Picture a profitable business with $100,000 of profit the owner wants in their pocket this year. The entity choice decides how many times the tax touches it.

The C-corp column shows the double tax directly. The company pays 21% of $100,000, which is $21,000, leaving $79,000. Paying that out as a qualified dividend taxed at 15% adds $11,850. The two layers total $32,850, a combined 32.85% on money that started as a single pile of profit.

The S-corp column has one layer. The $100,000 lands on the owner's return and is taxed once. The $24,000 uses a 24% bracket for illustration and is still a simplification: the owner also pays Social Security and Medicare tax on the reasonable salary, and a 20% QBI deduction would push the income-tax figure below $24,000. The table's point is structural: the S corp skips the second, dividend-level tax the C corp pays.

Flip the situation and the C corp can win. If the owner leaves that $100,000 in the company to grow, only the 21% applies this year, and the dividend layer waits until the money is paid out. That is why fast-growing companies that reinvest profit often pick C-corp status.

C Corp vs S Corp: Side by Side

Which One Fits Your Business

Three questions settle it for most owners.

Are you raising money, or keeping it? Plans to take venture capital, bring in institutional or foreign investors, or issue more than one class of stock all run into the S-corp eligibility rules, so the C corporation is the structure that fits. C-corp stock can also qualify for the Section 1202 gain exclusion on "stock in a C corporation," a draw for founders who expect to sell. If instead you take most of the profit out each year to live on, the S corp's single layer and 20% QBI deduction usually leave you with more.

Are you reinvesting profit to grow? S-corp profit is taxed to you whether you take it out or not, while profit left in a C corporation is taxed once at 21% this year, so a business that plows cash back to expand sometimes favors the C corp, with the accumulated earnings tax as the outer limit.

Can you defend a salary and the paperwork? The S corp's payroll-tax saving exists only if you run real payroll and pay yourself a reasonable wage. A C corp avoids that salary question but adds its own corporate return and the second tax on anything you distribute.

Whichever you choose, the tax is calculated on net profit: gross income minus every expense you can document. Miss deductions and you overpay under either election. Categorizing costs the way the return expects, and keeping an income tracker that shows profit in real time, is the groundwork the entity choice sits on. SparkReceipt does not file your 1120 or 1120-S or run payroll, but it keeps the books those returns are built from clean, and it publishes to QuickBooks Online or Xero when your accountant wants the ledger there.

Common Misconceptions

"An S corp pays less tax than a C corp, full stop." True only for profit the owner takes out. For profit reinvested in a growing business, the flat 21% corporate rate can beat a high individual rate, and the dividend layer waits until the money is paid out.

"Electing S status changes my company." It changes only the tax treatment. The corporation, its shares, and its liability shield are untouched, and you can revoke the election later to return to C-corp taxation.

"I can set my S-corp salary to almost nothing." The salary has to be reasonable for the work you do. The IRS can reclassify an underpaid salary back into wages, with back payroll taxes and penalties, so an aggressive number is a liability, not a strategy.

Frequently Asked Questions

Is an S corp or a C corp better for a small business? For a profitable small business whose owners take the money out, the S corp's single layer of tax plus the 20% QBI deduction usually wins. A C corp fits better when you are raising outside capital or reinvesting profit to grow.

When is Form 2553 due? To take effect for the current tax year, Form 2553 must be filed "no more than 2 months and 15 days after the beginning of the tax year," which is March 15 for a calendar-year corporation.

Do S corporations pay any federal income tax? In the ordinary case, no. Profit passes through to the shareholders, who pay the tax on their own returns. A few special situations, such as built-in gains, can create an entity-level tax.

Can an LLC be a C corp or an S corp? Yes. An LLC can elect corporate taxation and then, if it qualifies, elect S-corp status on Form 2553. The entity stays an LLC; only the tax treatment changes.

Key Takeaways

• A C corp and an S corp are the same legal entity taxed two different ways. "C" is the default; "S" is an election made on Form 2553.
• A C corporation pays a flat 21% corporate tax, then its shareholders pay again on dividends, so distributed profit is taxed twice.
• An S corporation pays no income tax of its own. Profit flows to the owners' returns through Schedule K-1 and is taxed once, with a 20% QBI deduction available.
• On $100,000 taken out the same year, the C-corp route cost about $32,850 in federal tax; the single S-corp layer is usually less. For profit left in the company to grow, the 21% C-corp rate can be cheaper.
• The S corp's limits (100 shareholders, one class of stock, no foreign or entity owners) rule out most outside investment, which is where the C corporation fits.
• Both taxes land on net profit, so documenting every deductible expense is the move that pays off under either election.