Is My Company an S Corp or C Corp? The California Tax Distinction That Could Mean $34,000 More in Your Pocket
Every year, California entrepreneurs discover they’ve been filing under the wrong corporation status and leave money on the table—some over $34,000 according to recent KDA client data. Do you know how to answer, “is my company an S Corp or C Corp?” If not, this could be the most valuable five minutes you’ll spend all year.
For the 2025 tax year, the IRS is enforcing stricter penalties and the Franchise Tax Board (FTB) is cross-referencing business entities with federal returns like never before—a mismatch doesn’t just cost money, it can put your company at risk. Today’s entrepreneurs, W-2 earners with side gigs, real estate investors using LLCs, and professional service owners face a high-stakes entity test. Get this right, and you’ll avoid double taxation, cut audit risk nearly in half, and save thousands in Social Security and Medicare taxes. Get it wrong, and you may face penalties, missed write-offs, or even dissolution of your business rights.
Quick Answer: S Corp vs C Corp in Plain English
At the most basic level, a C Corp is taxed separately from its owners, paying its own corporate tax rate. An S Corp passes its income and losses through to shareholders’ personal returns—so you avoid federal “double taxation.” Both can be LLCs for legal purposes, but their tax profile is determined by an IRS election (Form 2553 for S Corp, default 1120 for C Corp).
To check your own status: Look at your latest IRS letter or tax return. If you file IRS Form 1120S, your business is taxed as an S Corporation. If you file IRS Form 1120, it’s taxed as a C Corporation. Still not clear? We’ll break it down below.
Expert Insight: When clients ask is my company an S Corp or C Corp, the quickest confirmation comes from your IRS and FTB records—not your LLC papers. The IRS assigns an entity code in its master file that determines whether your income is taxed at the shareholder or corporate level. You can confirm this by reviewing your IRS account transcript under “Form Type”—1120S means S Corp, 1120 means C Corp. Many California founders discover their preparer never filed Form 2553, leaving them taxed as a C Corp by default.
How Entity Election Affects Your 2025 Taxes
Say you form an LLC in California. By default, it is treated as a disregarded entity (if single member) or partnership (if multi-member) for tax. But you can elect S Corp or C Corp status. This election determines how you pay yourself, which taxes you owe, and what write-offs you can use:
- S Corp: Pass-through taxation. Owners pay tax on salary (W-2) plus any profit distributions. No corporate-level tax.
- C Corp: Company pays 21% federal tax on profits plus California corporate income tax. Owners pay another tax on dividends.
For example, Sarah, a consultant with $180,000 net profit, elects S Corp status for her LLC. She pays herself $90,000 in reasonable salary (subject to payroll taxes) and takes the remaining $90,000 as distributions (not subject to self-employment tax). Her actual savings: $13,770 in payroll taxes compared to default LLC treatment—and she avoids the C Corp double taxation entirely.
Strategic Note: Understanding is my company an S Corp or C Corp isn’t academic—it changes how every dollar is taxed. A misclassified C Corp pays 21% federal tax plus California’s 8.84% before owners can even draw dividends. In contrast, an S Corp passes income directly through to owners, often cutting effective tax rates by 10–15 percentage points when salary and distribution planning are optimized. That difference compounds annually for high-profit service businesses.
KDA Case Study: Tech Consultant Avoids $34,200 Double Tax Trap
Brian, a Los Angeles-based consultant, operated his LLC as a C Corp by default for two years after incorporating—unaware that his bookkeeper never filed the S Corp election. He paid 21% in federal corporate taxes and 8.84% California Franchise Tax on $190,000 in business profits, totaling $56,156 in taxes before any owner distributions.
KDA reviewed Brian’s structure and realized he qualified for S Corp treatment. By filing Form 2553 (and obtaining late election relief per IRS guidance), the next year Brian ran $90,000 through payroll and took $100,000 as distributions. His combined federal, state, and payroll taxes dropped by $34,200—and he cut audit exposure dramatically, since his salary matched industry standards (see S Corporation IRS guidance).
The total cost of restructuring with KDA was $3,750, or less than 11% of his first-year savings. Brian then reinvested his savings in marketing and doubled his top-line revenue for 2025. KDA regularly helps tech founders, creatives, and high-earning solopreneurs evaluate their entity type and prevent this six-figure mistake.
Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.
How to Check: S Corp or C Corp Status in Under 10 Minutes
Most business owners assume their accountant “took care of” the entity election—but over 27% of new businesses in California had the wrong status in 2024, according to KDA internal audits. Here’s a step-by-step check:
- Locate your IRS Acceptance Letter (CP261) and most recent tax return.
- If your return is Form 1120S (S Corp), you’ll see a schedule for officer compensation and K-1s to owners.
- If your return is Form 1120 (C Corp), you’ll see direct corporate tax calculation and dividend schedules.
- Still not sure? Request a transcript from the IRS using Form 4506-T or call your preparer for last year’s filing summary.
Pro Tip: The S Corp election (IRS Form 2553) must be filed within 75 days of forming your entity—or you need late election relief. Check official IRS 2553 election instructions for more.
Deductions, Salaries, and Distribution Rules: What Changes by Entity
The entity you select opens or closes the door on several major deductions and compensation strategies for 2025:
- S Corp: Allows for the separation of salary (subject to employment taxes) and distributions (not subject to self-employment tax). Owners must pay themselves reasonable compensation according to IRS guidelines (IRS S Corporation rules), but can then take additional profit as distributions, usually at a lower tax cost.
- C Corp: All profits are taxed at the corporate level; only after paying corporate tax can you distribute dividends—which are then taxed again at the individual shareholder rate. However, C Corps can retain earnings in the business (up to $250,000) for expansion, and may offer fringe benefits or stock plans not available to S Corps.
For a detailed comparison table, see our complete S Corp tax guide.
What If I Own a Single-Member LLC? Can I Still Be an S Corp?
This is a common misunderstanding: Single-member LLCs can absolutely elect to be taxed as an S Corp, but only after meeting all eligibility rules:
- Must be a domestic entity (US-based)
- Only allowable shareholders (individuals, certain trusts, estates)
- No more than 100 shareholders
- Only one class of stock
Once elected, you’re required to pay yourself a reasonable salary (reported on W-2), run payroll taxes, and file Form 1120S annually. Done properly, this setup can help freelancers, consultants, and small business owners avoid over $10,000 per year in self-employment taxes.
Why Most Business Owners Miss This Election—And What It Costs
The biggest trap? Many first-time California LLC owners think filing Articles of Organization with the Secretary of State completes their tax status—but legal and tax status are separate. If no election is filed, the IRS defaults you to C Corp for corporations or disregarded entity/partnership for LLCs. This costs owners thousands in unnecessary taxes and limits access to key deductions like the pass-through deduction under IRC Section 199A.
Red Flag Alert: If your CPA or bookkeeper never had you sign and file IRS Form 2553, you’re likely not an S Corp. The IRS won’t prompt you—you must proactively elect. Missing the deadline can still be fixed retroactively, but it requires supporting documentation and careful handling per IRS Rev. Proc. 2013-30.
Pro Insight: The question is my company an S Corp or C Corp becomes critical during IRS or FTB audits. Mismatched filings—such as payroll reported under S Corp rules but returns filed as a C Corp—can trigger reclassification, late payroll tax assessments, and loss of pass-through deductions under IRC §199A. The IRS treats entity status as a matter of record, not intent, so maintaining consistent filings and documentation is the only defense against back-tax exposure.
Real-Life Scenarios: Who Benefits Most From Each Entity?
- Consultant (1099): $160,000 net income. S Corp status saves $11,176 in payroll tax vs Schedule C LLC. C Corp would create double taxation if profits distributed.
- High-volume ecommerce: $400,000 profit; C Corp may be preferred if profits are retained for growth and future sale, leveraging flat 21% rate and avoiding initial double taxation.
- Real estate investor: S Corps usually not advised for holding rental properties due to potential loss of step-up basis and capital gain treatment upon sale; LLC or C Corp may be better for asset protection and legacy planning. See real estate investor strategies.
- W-2 + Side Hustle: If day job already covers Social Security wage base, S Corp status on a growing side business can save another $8,700+ in self-employment taxes annually.
Payroll, Owner Draws, and Legal Compliance: What You Must Get Right in 2025
Choosing S Corp or C Corp isn’t just about the tax rate—you must run compliant payroll, keep minutes, issue W-2s, and file informational returns (W-2, 941, DE9C for CA payroll). Failure to comply, especially with California’s strict FTB and EDD enforcement, can lead to penalties and reclassification audits. For help setting up or restructuring payroll, see our bookkeeping and payroll services.
What If I Need to Change My Election?
If your business model has changed (e.g., you’ve grown, want to add investors, or plan to sell), you can switch between S Corp and C Corp status, but timing and process are critical. To elect S Corp status, submit IRS Form 2553 before March 15 of the tax year (or file late with a reasonable cause declaration). Changing from S to C requires IRS notification, state business filing, and careful planning—because built-in gains tax and accumulated earnings tax traps await.
If you’re not sure, have a tax strategist review your returns, IRS letters, state filings, and Articles of Organization to ensure your entity matches your business goals and minimizes tax exposure.
This information is current as of 10/23/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.
Pro Tip: Only file IRS Form 2553 if you intend to run payroll and keep regular corporate records. S Corp status creates “reasonable compensation” requirements, audited regularly since 2023.
FAQ: What You Need to Know Next
Can I backdate an S Corp election if I missed the window?
Yes, if you have reasonable cause, you may qualify for late election relief under IRS Rev. Proc. 2013-30. Consult a tax pro for documentation requirements.
Can I switch from C Corp to S Corp later?
Yes, with IRS notice and specific filings; consult a tax strategist prior to a major change to avoid built-in gains tax penalties.
What happens if I do nothing?
The IRS and FTB will tax you according to your default entity type, regardless of your intent. This nearly always means higher taxes for LLCs over $100K in profit.
Book Your Entity Type Assessment—Get Clear on Your S Corp or C Corp Status
Curious if your company’s status is costing you five figures in unnecessary taxes or risk? Book a confidential assessment with a seasoned KDA strategist—we’ll review your returns, FTB filings, and payroll records. You’ll get a clear answer and a plan to fix any mismatches before the IRS or FTB can penalize you. Click here now to schedule your strategy session and lock in your best tax position for 2025.
