Electing S corporation status can cut self-employment tax for profitable LLCs and sole proprietors. It also adds payroll, filings and cost, so it only pays above a certain profit.
How the saving works
As a sole proprietor or single-member LLC, all your net profit carries 15.3% self-employment tax, up to the Social Security wage base, then 2.9% Medicare (plus 0.9% above $200,000 for single filers). As an S corp, you pay yourself a reasonable salary through payroll, which carries payroll taxes, and take the rest as distributions, which do not.
Reasonable salary
The IRS expects salary to reflect what you would pay someone else to do your job. Too low invites reclassification of distributions as wages, with back taxes and penalties. Base it on market pay for your role, hours and industry, and keep the evidence.
When it usually makes sense
- Net profit consistently above roughly $50,000 to $80,000 after a market salary.
- Profit you expect to continue, not a one-off year.
- You can run payroll and file a separate corporate return (Form 1120-S) on time.
Costs to weigh
- Payroll provider and quarterly payroll filings.
- Form 1120-S preparation and some state fees or franchise taxes.
- Less flexibility: one class of stock and limits on who can own shares.
Deadlines
File Form 2553 within 2 months and 15 days of the start of the tax year the election should apply to, or at any time in the year before. Late elections can sometimes be accepted with reasonable cause.
Check your numbers
Our S corp savings check compares the two set-ups for your profit and salary. For ongoing payroll and books, see our payroll services for US businesses.
General information, not tax advice. Your CPA should confirm the election.
