C corp vs S corp: the difference in tax and ownership for 2026
Both are corporations under state law; only the federal tax treatment differs. Enter profit, salary and the share paid out to compare the two.
Tax this year as a C corp
$75,766
Same profit as an S corp: $73,562 · $60,370 left inside the company
| Corporate income tax (21%) | $32,095 |
| Payroll taxes on the salary | $14,050 |
| Income tax on the salary | $10,970 |
| Tax on dividends (0/15/20%) and NIIT | $9,055 |
| California personal income tax | $9,595 |
Computed by Radif Partners from IRS documents for tax year 2026 · How we calculate · no email asked, nothing sold
The difference between an S corporation and a C corporation is how many times the profit is taxed. An S corp pays no federal income tax itself: its profit passes to the owners and is taxed once, at their personal rates. A C corp pays a flat 21 % on its profit, and the dividends it pays later are taxed again on the owner's return at 0%, 15% or 20%, plus the 3.8 % net investment income tax for high incomes. With a salary at 40% of profit, a single owner pays $16,146 as an S corp on $100,000 of profit against $23,640 as a C corp paying everything out; at $200,000, $42,073 against $58,448. A C corp that keeps its profit pays less this year, and at $400,000 less than the S corp, but the second tax only waits for the payout. An S corp is also limited to 100 eligible shareholders and one class of stock.
In a state's corporate registry, a C corp and an S corp look the same: articles of incorporation, a board, shareholders and stock. The letters refer to subchapters of the Internal Revenue Code. Subchapter C is the default for every corporation; subchapter S is a status the corporation asks for. That means the question "C corp or S corp" is really "should this corporation file Form 2553?", and the answer depends on profit, on what happens to it after the year ends and on who owns the shares. The quick tool below lines up all four structures at one profit.
Four structures, one profit
Lowest
S corp
| Sole prop or LLC | $28,462 |
| S corp (45% salary) | $23,884 |
| C corp, all paid out | $31,182 |
Federal only, single filer.
One layer of tax or two
A C corporation is a separate taxpayer. It files Form 1120 and pays 21 % on its taxable income under section 11 of the Code, with no brackets. The IRS page on forming a corporation spells out the consequence: the profit is taxed to the corporation when earned and taxed again to the shareholders when distributed as dividends, the corporation gets no deduction for the dividends it pays, and shareholders cannot deduct the corporation's losses.
An S corporation removes the first layer. Its income, losses and credits flow to the shareholders on K-1s and are taxed only on their personal returns, at rates from 10 % to 37 %. A loss can offset other income, within the owner's basis in the stock and debt. In both structures, an owner who works in the business takes a salary through payroll, and that salary is deducted by the company before either tax is computed.
The totals at three profit levels
The table holds the owner's salary at 40% of profit, for a single filer in a state without income tax. "Paid out" means the C corp distributes all of its after-tax profit as qualified dividends; "kept" means it distributes nothing this year.
| Profit | S corp, total tax | C corp, all paid out | C corp, all kept | Kept inside the C corp |
|---|---|---|---|---|
| $100,000 | $16,146 | $23,640 | $20,731 | $44,949 |
| $200,000 | $42,073 | $58,448 | $44,958 | $89,932 |
| $400,000 | $107,417 | $131,777 | $99,477 | $179,897 |
When the C corp pays everything out, the S corp wins at each level: $7,494 less tax at $100,000, $16,375 at $200,000 and $24,360 at $400,000. When the C corp keeps everything, its bill for the year drops below the S corp's at $400,000, because a flat 21 % on the kept profit is less than the 35 % bracket the S corp owner reaches there. At lower profits the owner's own brackets are below 21 %, and the S corp stays cheaper even against a C corp that pays nothing out. That high-profit gap is the argument for a C corp in a business that reinvests.
Retained earnings are a deferral, not an exemption
Profit kept inside a C corporation has paid only the corporate tax. When it is paid out later, as a dividend or on the sale of the shares, the second layer arrives, at the rates that apply then. A C corp therefore pays off when the money stays in the business for years and funds growth: hiring, equipment, inventory, a product. A consultant who needs the profit to live on gets the double tax every year, and the S corp or a default LLC is almost always cheaper. Planning to leave large balances in the company for years is a point to review with a CPA.
Who can own shares
The ownership rules often decide the question before the tax does. According to the Form 2553 instructions, an S corporation can have no more than 100 shareholders, all of them individuals, estates, certain trusts or exempt organizations, none of them a nonresident alien, and only one class of stock. A C corporation has none of these limits. A venture fund organized as a partnership, a parent company, a foreign founder or investors who want preferred shares with a priority on liquidation all require a C corp. Founders who plan to raise outside equity therefore often start as a C corp, while a business owned by one or two working people has little use for that flexibility. The C corporation guide goes through dividends, NIIT and the return in detail.
Switching later
A C corporation can become an S corporation by filing Form 2553, if it meets the tests on the effective date. It then carries some history with it: built-in gains on assets it held as a C corp, and passive income when it still has earnings and profits from those years, can be taxed at the corporate level. Going the other way, an S corporation that revokes or loses its status becomes a C corp and generally needs IRS consent to elect again within five years. The order matters, and changing twice is costly.
For a business owned by the people who work in it and paying them most of its profit, the comparison usually favors the S corp; the open question is then whether the S corp beats a plain LLC, which the LLC vs S corp calculator answers. The four structures side by side are on the LLC vs corporation page, and the reasonable salary guide explains the salary both corporations must pay a working owner.