Should my business be an S-Corp?
When Should You Consider Filing an S-Election for Your LLC?
If you’re a small business owner operating as a Limited Liability Company (LLC), you may have heard about the option to elect S Corporation (S-Corp) status for tax purposes. But what does this mean, and how do you know if it’s the right move for your business? Below, we’ll explain the benefits of filing an S-election and guide you through the steps required to make the switch.
What Is an S-Election?
An S-election allows your LLC to be taxed as an S-Corporation under Subchapter S of the Internal Revenue Code. This tax designation can provide significant advantages for certain businesses while retaining the legal and operational flexibility of an LLC.
Key Benefits of Filing an S-Election
Reduced Self-Employment Taxes
By default, LLC owners are subject to self-employment taxes (Social Security and Medicare) on all business income. Electing S-Corp status allows you to split your income into:
Reasonable salary: Subject to payroll taxes.
Distributions: Not subject to payroll taxes.
This structure can result in substantial tax savings as not all income will be subject to self-employment tax.
Retirement Plan Contributions
S-Corp owners paying themselves a salary may have higher limits for retirement plan contributions compared to sole proprietors or LLC members.
Enhanced Credibility
Operating under the S-Corp tax structure can signal financial sophistication to investors, lenders, and partners.
When Should You Consider S-Election?
Filing an S-election might be a good idea if:
Your business earns consistent profits (generally at least $40,000 annually), and you want to minimize self-employment taxes.
You can pay yourself a reasonable salary for your role in the business.
You’re looking to maximize retirement savings through payroll-based contributions.
Your state recognizes S-Corp taxation and aligns its rules with federal regulations.
However, it might not be suitable if:
Your business is new or has inconsistent earnings.
You don’t want to deal with the additional administrative requirements (e.g., payroll, corporate tax filings).
Steps to File an S-Election
Ensure Eligibility
The LLC must meet these criteria:
Be a domestic entity.
Have 100 or fewer shareholders (members).
Members must be U.S. citizens or residents.
Have only one class of stock (profit-sharing rights must be equal).
Obtain an EIN (Employer Identification Number)
If your LLC doesn’t already have an EIN, you’ll need one to file the S-election.
File IRS Form 2553
Prepare Form 2553 (“Election by a Small Business Corporation”).
Complete the form with:
LLC’s name and EIN.
Election effective date (typically the start of a tax year).
Member signatures (all members must consent to the election).
Submit the form within 2 months and 15 days after the start of the tax year you want the S-election to take effect.
Amend State Tax Status (if necessary)
Some states require additional filings to recognize S-Corp status. Check your state’s requirements.
Set Up Payroll
Once the S-election is approved, you must pay yourself a reasonable salary as an owner-employee. Use a payroll service to handle withholdings for Social Security, Medicare, and income taxes.
Maintain Compliance
File payroll tax reports and pay payroll taxes.
File your corporate tax return (Form 1120-S) annually.
Final Thoughts
Filing an S-election for your LLC can be a game-changer for tax efficiency, but it’s not a one-size-fits-all solution. Work with a CPA or tax advisor to evaluate your specific circumstances and determine if it’s the right choice for your business. With proper planning and compliance, the S-election can help you keep more of your hard-earned money while growing your business sustainably.
