How to Make an S-Corp Election for LLC in 5 Steps
If you run a small business and you're tired of paying self-employment tax on every dollar of profit, learning how to make an S-corp election for LLC could save you a meaningful amount of money.
Plenty of small business owners reach a point where this switch starts to make sense, and the process isn't very complicated, but there are important things to be aware of. Here's everything you need to know!
What Is an S-Corp Election?
An S-corp election is a tax status you apply for with the IRS. It doesn't change your LLC into a different kind of business. Your LLC stays an LLC. The election just changes how your business is taxed.
By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC is taxed like a partnership. In both cases, you pay self-employment tax on all of your profit.
When you elect S-corp status, you become an employee of your own business, pay yourself a reasonable salary, and take the rest of your profit as a distribution that isn't subject to self-employment tax.
For the right business, that split can lead to solid tax savings, and they often grow as your profit grows.
Not sure if an S-Corp makes sense for your business? Use our FREE S-Corp Calculator and get a clear, personalized answer!
How to Make an S-Corp Election for LLC
1. Confirm Your LLC Qualifies
Make sure your business meets the IRS requirements for S-corp status. Your LLC has to be a domestic business, every owner must be a U.S. citizen or resident, you can have no more than 100 owners, and you can only have one class of ownership.
Most small LLCs clear these requirements without any trouble.
2. Fill Out Form 2553
The S-corp election is made on IRS Form 2553, Election by a Small Business Corporation.
The form asks for basic details about your business, the date you want the election to take effect, and information about each owner.
3. Get Every Owner to Sign
Every owner of the LLC has to consent to the election in writing. Form 2553 includes a section where each owner signs off, so make sure you collect every signature before you file. Missing a signature will get your election denied or delayed.
If you're the only owner, you can skip this step.
4. File Form 2553 by the Deadline
To have the election apply to the current tax year, you generally need to file within 2 months and 15 days of the start of that year. If you miss the window, the IRS does allow late elections in certain cases, but you'll need to include a reason and meet their relief requirements.
Learn more about the S-Corp election deadline.
5. Set Up Payroll and a Reasonable Salary
Once your election is approved, you have to put yourself on payroll and pay yourself a reasonable salary. The IRS expects this salary to reflect what someone would earn doing your job, so you can't pay yourself almost nothing just to dodge payroll taxes. From there, you can take additional profit as distributions.
After you file, the IRS will send a notice (Form CP261) confirming your S-corp status, usually within 60 days.
What Is the S-Corporation Election Deadline?
To have your S-corp election apply to the current tax year, you generally need to file Form 2553 within 2 months and 15 days of the start of that year. For a business that follows the calendar year, that lands on March 15.
If you're a brand new LLC, the clock starts the day your business officially becomes active, not January 1. So you have 2 months and 15 days from that start date to file. You can also file the election anytime during the prior year if you already know you want S-corp status going forward.
Learn how to form an S-Corp in Texas.
What to Do If You Missed the S-Corp Election Deadline
Missing the deadline isn't the end of the road. The IRS allows late S-corp elections as long as you have a reasonable explanation for filing behind schedule.
To request late relief, you file the same Form 2553, but you include a statement explaining why you missed the deadline. You also have to show that you intended to be treated as an S-corp from your requested start date and that you've been running your business as if the election was already in place.
As long as you file within 3 years and 75 days of your intended start date and meet the IRS requirements, there's a chance your late election gets approved.
A tax professional can help you figure this out.
FAQs
Can I Switch Back to a Regular LLC After Electing S-Corp Status?
Yes, you can revoke your S-corp election by submitting a statement to the IRS. However, once you revoke it, you generally have to wait five years before you can elect S-corp status again. We recommend talking this decision through with a tax professional before you make the change.
How Much Does It Cost to Make an S-Corp Election?
Filing Form 2553 itself is free. The costs come from what S-corp status requires going forward, like running payroll, filing a separate business tax return, and often paying a tax professional to manage it all. However, for most businesses earning enough profit to elect S-corp status, those costs are small compared to the self-employment tax savings.
Can I Make an S-Corp Election If I'm the Only Owner of My LLC?
Yes, single member LLCs can easily elect S-corp status. As long as you meet the IRS requirements and your profit is high enough to justify the extra paperwork, being a one-owner LLC doesn't hold you back at all.
How to Keep Your S-Corp Compliant
Once your small business becomes an S-Corp, you'll have to follow through on the ongoing requirements to keep the tax benefits and stay on the IRS's good side.
This will look like:
Running payroll and paying yourself a reasonable salary
Withholding and remitting payroll taxes on time throughout the year
Filing your S-corp tax return (Form 1120-S) each year by the deadline
Sending yourself (and any other owners) a Schedule K-1 to report your share of the profit
Keeping your business and personal finances in separate accounts
Maintaining clean records of your salary, distributions, and expenses
If you don't do this right, you risk losing your S-corp status and getting hit with penalties from the IRS.
An S-corp election can save you a lot at tax time, but the savings only hold up when the election is filed correctly and the ongoing requirements are handled the right way.
At Desi Tax Service®, we can handle your S-corp election, set up your payroll, and build a tax strategy that keeps you compliant and with more money in your pocket. Learn more about our services or book a call!
