LLC vs S-corp
Written by the filing team at FastBusinessFiling. Reviewed .
An S-corp is not a type of company; it is a tax election that an existing LLC or corporation makes by filing IRS Form 2553. The LLC stays an LLC. What changes is how the IRS taxes its profit: instead of all net earnings being subject to 15.3% self-employment tax, the owner pays themselves a reasonable salary through payroll and takes the rest as a distribution that is not subject to that tax. That saving is real, and it is bought with payroll filings, a separate business return, and usually a bookkeeper. The election generally starts making sense somewhere around the point where the company nets more than the owner would reasonably be paid as a salary — but where exactly depends on your salary, your state, and your health insurance, which is why this is a question for a CPA with your numbers in front of them.
The short version
- The S-corp election does not change what your company is. It changes how it is taxed.
- The saving comes from self-employment tax on distributions, not from a lower income tax rate.
- The IRS requires a reasonable salary first. Paying yourself $0 and taking everything as distributions is the audit trigger.
- It costs you payroll, a separate 1120-S return, and usually an accountant. Net that off before you decide.
- An LLC electing S-corp status files Form 2553 only. Form 8832 is not part of it.
What the election actually does
By default, a single-member LLC is a disregarded entity and a multi-member LLC is a partnership. Either way, the profit flows to the owners' personal returns and the whole of it is subject to self-employment tax: 12.4% for social security up to the annual wage base, plus 2.9% for Medicare with no cap, or 15.3% combined.
Elect S-corp treatment and the company has to run payroll for its owner-employees. The salary is subject to payroll taxes exactly as before. What is left over, the distribution, is not. On $120,000 of profit with a $70,000 salary, the $50,000 distribution escapes a tax it would otherwise have paid, and that is the whole of the pitch.
The word doing the work is reasonable
The IRS requires an owner who works in the business to be paid reasonable compensation before taking distributions. Reasonable means what you would have to pay somebody else to do your job — and the agency has decades of case law on owners who decided their job was worth almost nothing.
This is where the strategy goes wrong. Setting the salary at $20,000 to squeeze the distribution is an audit position, not a plan, and the IRS's remedy is to recharacterise the distributions as wages and add penalties. A defensible salary is the price of admission, and it is what makes the election worth less at low profit than the internet promises.
What it costs on the other side
Payroll has to run, which means a payroll provider or an accountant, quarterly filings, and W-2s at year end. The company files its own return, Form 1120-S, in addition to your personal one. Bookkeeping stops being optional, because the salary-versus-distribution split has to be documented.
Call that a few thousand dollars a year in professional fees and software for most small companies. That is the number to subtract from the tax saving before deciding, and it is the number the calculators on formation sites tend to leave out.
The deadline, and what happens if you miss it
Form 2553 is due within 2 months and 15 days of the start of the tax year the election should apply to. For a calendar-year company that is March 15. A new company counts from the date it started business.
Miss it and you are not necessarily finished. IRS Revenue Procedure 2013-30 allows late elections up to 3 years and 75 days after the intended effective date, where the company has been behaving as an S-corp and has reasonable cause for filing late. The relief is routine enough that most late elections we see are accepted, but it is relief, not a right.
Who should not do this
If the business is a side project, if the profit is modest, or if you are reinvesting everything rather than taking money out, the election adds cost and paperwork for a saving that may not cover it.
If you have foreign owners, more than 100 shareholders, or another company as a member, you may not be eligible at all. And if the answer depends on a spreadsheet, get a CPA to build the spreadsheet. We prepare and file the election once you have decided; we do not decide it for you, and anyone who tells you the answer without asking what you earn is selling something.
Common questions
The question does not quite work, because an S-corp is a tax status an LLC can elect. The real question is whether your LLC should elect it, and that turns on your profit, the salary you would have to justify, and what an accountant will charge you to run the resulting payroll.
There is no clean threshold, and anyone quoting one confidently is rounding off your circumstances. The arithmetic starts to work when profit meaningfully exceeds a defensible salary for your role, because only the excess escapes self-employment tax. Below that, the compliance cost eats the saving.
No. An LLC electing S corporation treatment files Form 2553 alone; the election to be treated as a corporation is deemed to have been made. Form 8832 comes up when an LLC elects C-corp taxation instead. This confusion costs people money every year.
Yes, though not casually. Revocation has its own procedure and timing, and once revoked the company generally cannot re-elect S status for five years without IRS consent. Treat it as a decision with a five-year shadow, not a switch.
It depends entirely on your state. Some follow the federal treatment, some impose their own entity-level tax on S-corps, and a few ignore the election altogether. This is one of the places where general advice is worth nothing and a local CPA is worth a lot.
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FastBusinessFiling is a document filing service operated by Fast Filing Group LLC. We are not a law firm or an accounting firm, and nothing here is legal or tax advice. Rules and fees change; where this page states a figure, it carries the date it was checked. For advice about your own situation, talk to a licensed attorney or CPA.