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LLC Taxed as S Corp

Bottom line

An LLC taxed as S Corp hasn't become a new kind of company; it has just elected a different federal tax status. The LLC stays an LLC; only its federal tax treatment changes.
It is not automatic, and not every LLC qualifies. You have to be a domestic LLC, with no more than 100 owners, only eligible owners, and a single class of ownership.
It mainly pays off when profit sits well above a reasonable salary. This page helps you tell whether you are eligible and whether it fits. Filing it is a separate step.

“Taxed as an S Corp” is a tax classification, not a business type. Your LLC keeps its legal form and picks up a different set of federal tax rules. It is often pitched as a money-saver, but two questions decide whether it is right for you: can your LLC qualify, and does the math actually work?

This page covers both. When you have decided to go ahead, filing the election is its own step.

How an LLC is taxed before any election

Before you elect anything, your LLC already has a tax status by default:

A single-owner LLC is taxed as a sole proprietorship.
A multi-owner LLC is taxed as a partnership.
Either way, profit flows to your personal return, and the whole amount carries self-employment tax at 15.3% (12.4% for Social Security, 2.9% for Medicare).

Choosing to be taxed as an S Corp swaps that default for a different set of rules. The LLC does not disappear and does not change at the state level. Only the federal tax treatment changes.

What the S Corp election changes, and what it does not

Form 2553 puts the LLC under the IRS S corporation rules if the LLC qualifies. The company then files its own return, and your share of the profit reaches you on a Schedule K-1 that you report on your personal return.

Unlike a C corporation election, which taxes the company's profit at the entity level and can tax it again when it reaches you, the S election keeps a single layer of tax. It changes how you take your pay, not how many times the profit is taxed.

Can your LLC be taxed as an S Corp?

Not every LLC qualifies. To be taxed as an S Corp, the IRS requires the LLC to meet a fixed set of conditions:

Be a domestic LLC, formed in the United States.
Have only eligible owners: individuals, certain trusts, or estates. Partnerships, corporations, and nonresident-alien owners are not allowed.
Have no more than 100 owners.
Have a single class of ownership interest, so every owner shares profit and distributions in the same proportion.

What changes on your tax filings

Once the LLC is taxed as an S Corp, the paperwork required changes:

The business files its own annual return on Form 1120-S, instead of reporting on your Schedule C or a partnership return.
Each owner gets a Schedule K-1 for their share of the profit.
You go on payroll and receive a W-2, because the IRS expects an owner who works in the business to draw a real wage.

The IRS can reapportion your distributions as salary if they believe your salary is too low. Therefore, the salary must be reasonable for the work that you do.

We can help you work out what is a reasonable salary for the work that you do.

How to tell if an LLC taxed as S Corp fits you

Whether an S Corp election fits turns on your eligibility and the math. The benefit comes from the profit you take as distributions instead of salary, so it only pays once profit sits comfortably above a reasonable wage for your role. A few things change the result:

Below that wage line, the salary absorbs most of the profit, and the payroll cost plus the extra return can erase the savings.
Your home state may not recognize the S election, or may charge for it.
The salary interacts with your qualified business income deduction and your retirement contributions.

Because we read your business and personal returns together, the estimate accounts for all of that, not just the payroll line.

About a quarter of the clients' returns that I look at are not fully utilizing the deductions that they have available. I think that number is even more.

George Dimov, CPA, founder of Dimov Tax

When an LLC taxed as an S Corp does not fit

Profit barely covers a reasonable salary, so there is little left to take as distributions.
An owner is a nonresident alien or another entity, which makes the LLC ineligible.
You cannot yet run real payroll and file a separate business return without the cost eating the benefit.

If any of these describe you, the answer is to wait or skip it. We would rather tell you the profit level where it starts to pay than file an election that costs you money.

When you are ready to elect

Making the election is a separate, time-sensitive step: the form has a deadline, and the setup includes payroll and a new return. When you are ready, our LLC to S Corp conversion service handles the filing and the setup. The election generally has to be received within about two months and 15 days of the start of the tax year you want it to count for.

Personal and now LLC taxes. Super detailed, thorough, and also efficient and expedient.

Joan, Google review

LLC Taxed as S Corp

You should not have to guess whether your LLC can or should be taxed as an S Corp. A short look at your eligibility, your profit, and how you pay yourself answers both. If it is not the right move yet, we will tell you the profit level where it starts to be.

Send us your annual profit, your owners, and how you take money out of the LLC, and you will get a straight read on eligibility and fit.