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Frequently Asked Questions
An LLC is a legal business structure; an S corp is a tax election. An LLC can be taxed as an S corporation by filing IRS Form 2553 with the IRS. The LLC remains an LLC legally but is treated as an S corp for federal tax purposes. The key difference: S corp owners must pay themselves a reasonable salary (subject to payroll taxes) and can take remaining profits as distributions (not subject to 15.3% self-employment tax).
The S corp election makes financial sense when your LLC’s net profit exceeds approximately $40,000–$50,000 per year. Below that threshold, the cost of running payroll and filing a separate S corp tax return (Form 1120-S) often exceeds the tax savings. Above $50,000 in profit, the self-employment tax savings typically outweigh the additional compliance costs.
The savings depend on your net profit. Self-employment tax is 15.3% on the first $176,100 of net earnings (2026). With an S corp election, you pay SE tax only on your salary portion — not on distributions. Example: $100,000 profit, $60,000 salary, $40,000 distribution = SE tax savings of approximately $6,120/year. At $200,000 profit, savings can exceed $15,000/year.
The IRS requires S corp owner-employees to pay themselves a ‘reasonable salary’ — what you’d pay someone else to do your job. There’s no exact formula, but the IRS looks at: industry pay rates, company revenue, hours worked, and duties performed. A common approach: pay yourself 40–60% of net profit as salary and take the rest as distributions. Too low a salary is an audit red flag.
An LLC cannot become an S corp — they are different legal structures. However, an LLC can elect to be taxed as an S corporation by filing IRS Form 2553. The LLC remains an LLC under state law but is treated as an S corp for federal income tax purposes. This is the most common way small business owners get S corp tax treatment without the formality of incorporating.
S corp election adds complexity: (1) You must run payroll and pay yourself a salary, (2) You must file a separate S corp tax return (Form 1120-S) in addition to your personal return, (3) Payroll taxes add cost ($500–$2,000/year for payroll services), (4) S corps have restrictions — no more than 100 shareholders, only US citizens/residents, and only one class of stock. These costs are worth it once profit exceeds $40,000–$50,000.
Yes — state treatment of S corps varies. Most states recognize the federal S corp election and tax it similarly. However, some states impose additional S corp taxes: California charges a 1.5% S corp franchise tax (minimum $800), New York has an S corp filing fee, and some states don’t recognize S corp status at all. Always check your state’s rules before electing S corp status.
File IRS Form 2553 (Election by a Small Business Corporation) with the IRS. The deadline is: (1) by March 15 of the tax year you want the election to take effect, or (2) within 75 days of forming your LLC if you want it effective from day one. You can also make a late S corp election in some circumstances. The election is free to file.
Yes, but it’s complicated. You can revoke an S corp election by filing a statement with the IRS. However, if you revoke it, you generally cannot re-elect S corp status for 5 years. The revocation is effective the following tax year unless you specify otherwise. Consult a tax professional before revoking an S corp election.
S corps are pass-through entities — profits flow to shareholders’ personal returns (no corporate-level tax). C corps pay corporate income tax (21% federal rate) and shareholders pay tax again on dividends (double taxation). C corps are preferred for venture-backed startups (due to QSBS/Section 1202 exclusion), companies planning to go public, and businesses reinvesting most profits back into the company.
Yes. Maintaining a separate business bank account is essential for any LLC or S corp. Commingling personal and business funds can ‘pierce the corporate veil’ — eliminating your liability protection. You’ll need: your EIN, Articles of Organization, and operating agreement to open a business checking account.
S corp owner-employees pay: (1) Federal income tax withholding on their salary, (2) Social Security tax (6.2% employee + 6.2% employer = 12.4% on salary up to $176,100), (3) Medicare tax (1.45% employee + 1.45% employer = 2.9% on all salary), (4) State income tax withholding. Distributions are not subject to payroll taxes — that’s the tax savings.
The main disadvantages of S Corp election are: (1) you must run payroll and pay payroll taxes, (2) you must pay yourself a reasonable salary, (3) there are additional compliance costs (payroll service, quarterly filings), (4) S Corps cannot have more than 100 shareholders or non-US shareholders, and (5) the administrative burden is higher than a standard LLC. The savings must outweigh these costs — typically requires net profit above $40,000–$50,000.
S Corp election is right for you if: your net LLC profit exceeds $40,000–$50,000/year, you are currently paying full self-employment tax (15.3%) on all profits, you are willing to run payroll, and you plan to stay profitable for multiple years. The best way to know is to have a CPA run the numbers for your specific situation. Most owners save $5,000–$20,000 per year once they cross the threshold.
The IRS requires S Corp owner-employees to pay themselves a "reasonable salary" — what you would pay someone else to do your job. Typical ranges: $40,000–$80,000 for service businesses, $60,000–$120,000 for professional services, $80,000–$150,000+ for high-income professionals. The 60/40 rule (60% salary, 40% distributions) is a common starting point but should be validated by a CPA.
If the IRS determines your S Corp salary is unreasonably low, they can reclassify your distributions as wages, requiring you to pay back payroll taxes plus penalties and interest. The IRS actively audits S Corps with zero or very low salaries. Always document your salary decision with a comparable wage analysis and consult a CPA.