Life changes
Your Business Is Growing: Is It Time for an S Corp?
Once profit is steady, an S corporation election can reduce self-employment tax. It also adds payroll, a separate return and more bookkeeping, so the question is whether the savings outweigh the work.
Reviewed by LaToya Clark-Thompson, FounderLast updated
How the savings work
As a sole proprietor or single-member LLC, all of your profit is subject to self-employment tax. With an S corporation election, you become an employee of your own company. You pay yourself a reasonable salary through payroll, which carries Social Security and Medicare tax. The profit left after that salary passes through to you as a distribution, and distributions are not subject to self-employment tax.
The difference between the two is the potential saving. The S corp savings calculator gives a rough comparison, and S corp tax savings explains the math in words.
The catch: reasonable salary
The IRS expects an S corporation owner who works in the business to take a salary that is reasonable for the work done, judged by what the business would pay someone else to do it. Paying yourself an unrealistically low salary and taking everything else as distributions is one of the issues the IRS looks for. S corp reasonable salary covers how the figure is supported.
What it adds to your workload
- Payroll for yourself, with withholding, deposits, Form 941 each quarter and a W-2 at year end. See S corp payroll requirements
- A separate business return, Form 1120-S, with a Schedule K-1 to you, and a South Carolina S corporation return as well. See Form 1120-S
- Clean, reconciled books, including a balance sheet, because the return requires one
- Tracking your basis, so distributions and losses are handled correctly. See distributions and basis
- Handling owner health insurance and reimbursements through the company the right way
Those carry real cost and time. When profit is modest, they can cancel out the saving.
Signs it may be time
- Your profit has been steady for a while and is clearly more than a reasonable salary for your role
- You expect that level of profit to continue, not a single good year
- Your books are already kept monthly and reconcile to the bank
- You are willing to run payroll on yourself every period
If those fit, see when to elect S corp status and converting an LLC to an S corp.
Making the election
The election is made on Form 2553, filed with the IRS. To take effect for the current year it must be filed within a short window after the start of the tax year (or before it), and relief for late elections exists in some cases. An LLC can elect S corporation tax treatment without changing its state entity. South Carolina generally follows the federal election.
Our S corporation setup service runs the numbers with you first, then handles Form 2553, payroll setup and the books. Bring last year’s return, this year’s profit and loss, and your formation documents.
Frequently asked questions
At what profit does an S corp start to make sense?
There is no single number. It depends on what a reasonable salary for your work would be, how much profit sits above that salary, and the added cost of payroll and a separate return. The saving comes only from the profit above salary, so a business whose profit barely covers a fair salary gains little. The S corp savings calculator gives a starting estimate.
Can my LLC be taxed as an S corporation?
Yes. An eligible LLC can elect to be taxed as an S corporation by filing Form 2553 with the IRS. It stays an LLC under South Carolina law, so contracts, the bank account and the state registration do not change. What changes is how it files taxes: payroll for the owner, Form 1120-S and a K-1. See S corp vs. LLC.
What happens if I file Form 2553 late?
If it misses the window for the year you wanted, it normally takes effect for the following tax year. The IRS does offer late election relief when there was reasonable cause and the business has been acting as an S corporation, requested with Form 2553 itself and a statement explaining the delay. The IRS acceptance letter is the confirmation, so keep it.
Can I undo an S corp election later?
Yes, an S corporation election can be revoked, but once revoked, the business generally has to wait several years before electing again unless the IRS consents. Revoking can also have tax effects of its own, so it is worth planning rather than doing quickly. Revoking an S corp election explains the process.
Not the question you had? The full tax FAQ covers more ground, and our client reviews say what the work is actually like.
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