When to Elect S Corp
S corp status also allows business owners to be treated as employees of the business for tax purposes, which can result in tax savings on distributions and based on a reasonable salary.
Our S Corp vs. LLC Tax Calculator guide will explain how to tell whether an S corp election is right for your business. Read ahead to calculate your S corp tax savings when compared to a default LLC.
Recommended: If you’re making at least $80,000 in net earnings, an S corp may offer you tax advantages. Let Tailor Brands start your S corp for you today.
S Corp Tax Calculator - S Corp vs LLC Savings
Electing S corp status allows LLC owners to be taxed as employees of the business. This allows owners to pay less in self-employment taxes and contribute pre-tax dollars to 401k and health insurance premiums.
Our S corp tax calculator will estimate whether electing an S corp will result in a tax win for your business. Before using the S corp tax calculator, you will need to:
S Corp Savings Calculator
Calculate how much you can save by choosing an S Corp tax classification
As a Sole Proprietorship or Single-Member LLC
Self Employment Tax:
Salary Employer Tax
(S Corp pays)
Savings on Self Employment Taxes
Against this savings, you have to balance the time and costs of running payroll and tax withholding. To learn more about what this will cost, get a free tax consultation.
When to Elect S Corp Status for an LLC
The following criteria determine whether electing the S corp tax classification makes sense for an LLC:
- The business must meet IRS (Internal Revenue Service) S corp requirements
- The business owner(s) must consistently earn a "reasonable salary"
- The business owner should be able to pay themselves at least $20,000 in distributions
- The financial tax advantage must offset the cost of maintaining the S corp
IRS S Corp Requirements
To elect S corp status, a business must have 100 shareholders or less. In addition, S corps may only issue one class of stock. Other S corp requirements include:
- Are domestic LLCs or corporations
- Shareholders are U.S. citizens or permanent resident aliens
- Are owned by private individuals
The IRS has specific deadlines for a business to elect S corp status.
- If you want the S corp status to take effect the following year, you may file at any time in the previous year.
- If you’re filing within the same year, you must submit your application within 2 months and 15 days or before on the same calendar year, between January 1st and March 15 (no later than March 15).
- For a new business, you must file within 2 months and 15 days after you start your company, based on the effective date on the Certificate of Incorporation, for the S corp tax status to take effect.
Are you looking for the right business structure for your small business? Visit our How to Choose a Business Structure guide.
If an LLC elects S corp, the LLC’s owners become employees of the company. Under IRS rules, owner-employees must be paid a reasonable salary – that is, a salary that someone doing the same job would normally earn. The IRS looks to make sure that the S corp is paying its owners reasonable salaries. If a company fails to do so, it may be denied S corp status, have to pay a fine, and/or be required to pay back taxes.
Profit and Distribution
After electing S corp status, an LLC owner uses profits to pay salaries and distributions to owner-employees. The business must be able to cover a reasonable salary and at least $20,000 in distributions for the S corp election to make financial sense.
If an LLC owner forfeits a salary, he or she could be fined by the IRS.
Positive Return on Investment
Although the IRS charges minimal filing fees to elect S corp status, there are additional bookkeeping and payroll costs that can be expensive. Some LLCs already have employees and payroll costs, in which case this isn’t really a factor in deciding whether to elect S corp.
Because of the added administrative costs, the tax advantages of electing the S corp classification must be substantial enough to more than cover them for the election to make sense. Generally speaking, a reasonable salary plus $20,000 in annual distributions is often enough to save money on your tax return.
For help choosing payroll and accounting services, see our review of the Best Payroll Software for Small Business.
Ready to start your S corp today?
Use a professional service to form your s corp for you, so you can focus on the things that matter most.
How to Start an S Corp — Form 2553
- An existing LLC or corporation
- A new LLC or corporation (we don’t recommend starting a corporation and electing S corp status)
For detailed, step-by-step instructions for starting an S corp in your state, choose your state:
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- Washington D.C.
- West Virginia
S Corp Tax Return FAQ
Do S corps pay income tax?
S corps don’t pay a corporate income tax. Instead, owners pay personal income tax on the company’s earnings. For more information, see our S Corp Taxes guide.
Who pays more taxes, LLC or S corp?
This depends on how much the company makes. As a general rule of thumb, it only makes sense to file taxes as an S corp if there is enough net profit to pay owners a reasonable salary and at least $10,000 in annual distributions.
What is the S corp tax rate?
The S corp doesn’t have a specific tax rate because S corp income passes through to the owner’s individual tax return. At that point, the S corp income is subject to federal, state, and FICA taxes based on the individual owner’s tax bracket and filing status.
For more information, see our S Corp Taxes guide.
Does an S corp have limited liability protection?
An S corp is a tax status that can be elected by an LLC or corporation. LLCs and corporations have limited liability protection. A business owner will not lose liability protection by electing S corp tax status.
For more information, see our What is an S Corporation?
What is the difference between an S corp and a C corp?
A C corporation (C corp) has double taxation:
- The business is taxed at a flat tax rate (currently 21%)
- The shareholders are then taxed on the distributions they receive from the business on their personal tax return at their income tax bracket
An S corporation (S corp) offers tax savings:
- The business itself is not taxed
- There is pass-through taxation
- Owner(s)/shareholders receive distributions (profits, deductions, credits, and losses are passed down to the owner(s)/shareholders); this is based on the company percentage they own.
- S corp distributions only pay income tax
- Owner(s) have a reasonable salary that pays employment taxes and income tax
If you form a corporation without electing the S corp status, your business will automatically be taxed as a C corp.
Where can I find S corp tax return forms?
You can find the PDF IRS tax returns forms in our S Corp Tax Returns guide.
What are the advantages of an S corp?
The advantages of an S corp are the tax benefits. Business owners can save on employment taxes, since they only pay employment taxes and income tax on their reasonable salary.
The remaining distributions (profits after operational costs and the owner’s salary) are only subject to income tax (and not employment tax).
You’ll also gain credibility with your clients and potential investors, plus liability protection.
What are the disadvantages of an S corp?
Some S corp disadvantages include:
- More IRS scrutiny to ensure the business owner(s) are paid a reasonable salary
- Additional costs to formalize a business
- Annual fees that vary depending on the state
- Compliance requirements
Is subchapter S the same thing as an S corp?
Yes, subchapter S is the same thing as an S corp. For more information, see our What is an S Corporation guide.
How an S Corp is taxed?
An S corp is a pass-through tax status. The S corp isn’t taxed on its profit. Instead, the profit passes through to the owner's individual tax returns. An S corp does have to pay employer FICA taxes on employee salaries. For more information, see our S Corp Taxes guide.
Does an S corp have to file taxes?
Yes, an S corp files taxes at the state and federal level. For more information, see our S Corp Taxes guide.
Which is better for taxes, an LLC or an S corp?
The default LLC tax status is better for small businesses that reinvest profit to grow their business. An S corp is better for businesses that have profit left over to pay owners a reasonable salary and at least $10,000 in distributions.
For more information, see our LLC vs. S Corp guide.
Do S corps pay state income tax?
Yes, S corp income passes through to the owner’s individual tax returns and is subject to state income taxes.
For more information, see our S Corp Taxes guide.
Does an S corp owner have to take a salary?
Yes, an S corp owner must take a reasonable salary per IRS guidelines. Reasonable is defined as being a fair market salary for the work performed.
For more information, see our What is an S Corporation guide.
SBA - Business Structure: https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
SBA - S corporations: https://www.sba.com/legal/s-corporation/
SBA - Tax Planning and Reporting for Small Business: https://www.sba.gov/sites/default/files/files/PARTICIPANT_GUIDE_TAX_PLANNING.pdf
IRS - Limited Liability Company (LLC): https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
IRS - S Corporations: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
IRS - Forming a Corporation: https://www.irs.gov/businesses/small-businesses-self-employed/forming-a-corporation
IRS - Tax Information on S Corps: https://www.irs.gov/pub/irs-prior/p589--1995.pdf
IRS - Instructions for Form 1120s: https://www.irs.gov/pub/irs-pdf/i1120s.pdf
IRS - Where to File Form 1120s: https://www.irs.gov/filing/where-to-file-your-taxes-for-form-1120-s