LLC vs S-Corp in Virginia: 2026 Tax Comparison, Savings, and Step-By-Step Guide
Choosing the right business structure in 2026 can impact not only your tax bill, but also your compliance obligations and long-term success. In this in-depth guide, we compare Limited Liability Company (LLC) and S Corporation (S-Corp) options for Virginia entrepreneurs, using up-to-date laws from the IRS and Commonwealth of Virginia. Our discussion is tailored for small business owners, real estate investors, self-employed professionals, and high-net-worth individuals seeking tax efficiency in the 2026 filing year.
What is the Difference Between an LLC and S-Corp in Virginia?
Both LLCs and S-Corps are popular choices due to their liability protection and pass-through taxation. However, they are very different in terms of tax treatment, administrative complexity, and payroll requirements.
| Feature | LLC | S-Corp |
|---|---|---|
| Entity Creation | Formed with Virginia SCC as LLC | Formed as LLC or Corp, then elect S-Corp with IRS Form 2553 |
| Taxation | Default: Pass-through, subject to self-employment tax | Pass-through, reasonable salary subject to payroll tax, distributions not |
| Compliance | Annual report, fewer formalities | Payroll reports, more formalities, reasonable compensation rules |
Key 2026 Virginia Tax Rates and IRS Updates
- Federal Income Tax Brackets 2026: Updated per IRS inflation adjustments.
- Self-Employment Tax: 15.3% up to $163,600 for Social Security, 2.9% Medicare (+0.9% medicare for high earners).
- Virginia Individual Tax: 2–5.75% with phased rate increases for higher income in 2026.
- 2026 S-Corp Guidance (IRS)
- Virginia SCC Business Portal
LLC Taxation in Virginia
By default, profits from a single-member or multi-member LLC ‘pass through’ to the owner’s personal tax return. All net earnings are subject to federal and Virginia income tax, plus self-employment tax on the federal side. There is no Virginia entity-level tax for standard LLCs.
When Does an LLC Make Sense?
- You expect low or sporadic profits (under $40,000 net per year)
- You want simplicity and minimal paperwork
- All profits are distributed to owners annually
S-Corp Taxation in Virginia (2026)
An S-Corp is a tax status, not a different type of entity. Profits are split into “reasonable salary” (subject to payroll and income taxes) and “distributions” (subject only to income tax). This allows you to potentially reduce self-employment tax exposure, provided you pay yourself a reasonable salary per IRS guidelines.
| S-Corp Income Treatment | Tax Applies? |
|---|---|
| Reasonable Salary (W-2) | Income & Payroll Tax (SS/Medicare, Virginia, FUTA/SUTA) |
| Distributions to Owner | Only Income Tax (No SE/Payroll Tax) |
When Does S-Corp Status Make Sense?
- Annual net profits expected over $45,000
- Owner actively works in business (not just a passive investor)
- You are willing to run payroll, file additional forms, and maintain tight records
2026 Reasonable Compensation: What Does the IRS Require?
The IRS requires that S-Corp owners pay themselves a “reasonable” salary, which is subject to payroll taxes. Reasonableness depends on your profession, market rates in Virginia, business profits, and the time you spend working. The IRS is auditing S-Corps more aggressively in 2026 for underpayment of wages.
Virginia LLC & S-Corp Formation and Annual Filing Costs (2026)
| Fee Type | LLC | S-Corp |
|---|---|---|
| Formation Filing (one-time) | $100 (SCC) | $100 + S-Corp election (no state extra) |
| Annual Registration | $50 | $50 (plus payroll report costs for S-Corp) |
| Payroll Service (estimate) | – | $400+/yr |
LLC vs S-Corp: Tax Savings Example with 2026 Data
Let’s model a Virginia consulting business with $120,000 net income in 2026:
- LLC: All $120K is subject to federal income tax, Virginia tax, and self-employment tax (approx $17,940 SE tax)
- S-Corp (with $60K salary): Only $60K salary subject to payroll/Social Security/Medicare taxes. $60K distribution escapes 15.3% SE tax. Payroll tax on $60K salary: ~$9,180. Tax savings: $8,760 (as calculated using our LLC vs S-Corp Tax Calculator!)
Step-by-Step: Electing S-Corp Status in Virginia for 2026
- Form an LLC or Corporation with Virginia SCC
- File IRS Form 2553 by 3/15/2026 to elect S-Corp status
- Register for payroll with IRS and Virginia Tax
- Set up payroll and run reasonable salary
- Distribute profits as dividends
- Maintain accurate books and file annual S-Corp return (Form 1120S), Virginia return
Case Studies: Real Virginia Business Owners (2026)
- Real Estate Agent: $180,000 net income chose S-Corp, saving $18,000 on 2026 self-employment taxes with a $90K salary
- IT Consultant: $45,000 net income remained as LLC due to low excess over reasonable salary threshold
S-Corp Risks & Mistakes to Avoid
- Failing to pay a reasonable salary (triggers IRS audit & penalties)
- Missing Virginia annual filings
- Commingling personal and business funds
- Incorrect late S-Corp election or payroll setup
FAQs: LLC vs S-Corp Virginia 2026
- Should I convert my LLC to S-Corp in 2026?
- How does the 2026 IRS SE tax cap affect S-Corp savings?
- Can real estate investors use S-Corps?
- What is the deadline for S-Corp election in Virginia?
- Is health insurance tax deductible for S-Corp owners?
- Are there Virginia-specific S-Corp rules in 2026?
- Can an S-Corp have out-of-state shareholders?
Useful Resources (2026)
- LLC vs S-Corp Virginia Tax Calculator (2026) (Internal Link)
- Virginia 2026 Tax Filing Services (Internal Link)
- IRS S Corporations (External Link)
- Virginia SCC Business Portal (External Link)
- IRS Topic No. 761 (External Link)
Conclusion
For Virginia business owners, comparing LLC and S-Corp status in 2026 means considering formation costs, annual filing obligations, payroll requirements, and—most importantly—potential tax savings. Use the LLC vs S-Corp Tax Calculator to estimate your situation, and consult a tax professional before making significant entity changes.
