How LLCs Are Normally Taxed
When it comes to the amount of tax you owe the federal and state government, your income from an LLC is typically treated as follows:
- 1Your business earns revenue
- 2You deduct any allowable business expenses
- 3The amount remaining is your business profit, which you pay to yourself
- 4You pay self-employment tax of around 15 percent on any profits
- 5You pay federal tax at various income bands on any profits
- 6You pay state tax on any profits
An S Corporation Tax Election reduces the amount of tax you pay in step 4, self-employment tax. It has no effect on steps 5 and 6.
How Much Can You Save?
Under a standard LLC tax arrangement, your income "flows through" to your personal 1040 tax return and business profits are treated as personal income — meaning you pay self-employment tax (Social Security + Medicare, ~15.3%) on every dollar of profit.
Self-Employment Tax as an LLC
With a standard LLC, all profits flow through to your personal return. You pay ~15.3% self-employment tax on all profits, regardless of how much you actually pay yourself.
Example: $90K profit × 15.3% = ~$13,770 in SE tax
Payroll Tax as an S Corporation
With an S Corp election, you split your income into a reasonable salary (subject to payroll tax) and distributions (not subject to SE tax).
Example: $50K salary × 15.3% = ~$7,650 in payroll tax (saving ~$6,120/year)
The S Corp election lets you save potentially thousands of dollars each year in self-employment taxes. The exact savings depend on your profit level and the reasonable salary you assign yourself.
Assigning a Fair Salary
One important part of the S Corporation Tax Election is that you must pay yourself a fair salary, which is subject to payroll taxes. The IRS requires that S Corp owner-operators pay themselves a "reasonable compensation" for the work they perform.
What counts as "reasonable" depends on your industry, role, and what comparable salaries are for similar work. Setting your salary too low can trigger an IRS audit, while setting it too high reduces your tax savings.
We recommend consulting with a tax professional to determine the right salary for your situation. The distributions you take above your salary are not subject to self-employment tax — that's where the savings come from.
Administrative Overhead of the S Corporation Election
Because it can reduce your tax burden by such a substantial amount, the S Corporation Tax Election is worth considering for profitable LLCs. However, it does come with additional administrative requirements:
Setting Up Monthly Payroll
You will need to set up a monthly payroll where you pay yourself a salary and submit your payroll taxes (federal and state) on schedule.
Additional Tax Filings
As an S Corp, your business will need to file a separate S Corp tax return (Form 1120-S) in addition to your personal return, plus quarterly estimated payroll tax deposits.
How To File Your S Corp Tax Election
There are a couple of ways you can file Form 2553 (S Corporation Tax Election). If you want to complete the filing process yourself:
- 1Go to the Internal Revenue Service website.
- 2Find the section on S Corporation Tax Elections.
- 3Download Form 2553.
- 4Gather the required information for Form 2553 and fill it in (business name, EIN, tax year, officer signatures, and shareholder consent).
- 5Send the form back to the IRS, typically by mail or fax (the IRS does not accept Form 2553 electronically).
- 6Wait for notification of acceptance of your tax election — typically 60 days.
Important Deadlines
- For the S Corp election to apply to the current tax year, you must file Form 2553 no more than 2 months and 15 days after the beginning of the tax year.
- For a new LLC, file within 2 months and 15 days of formation to have the election apply for the first year.
- If you miss the deadline, you may be able to get a late election relief from the IRS in certain circumstances.
Common Questions About Filing Your S Corporation Tax Election
Does an S Corp election affect my LLC's liability protection?
No. You still get the same limited liability protections as with a regular limited liability company. The S Corp election is purely a tax classification change — it doesn't alter your legal entity structure.
How much could I save with an S Corp election?
You could save yourself thousands of dollars a year in self-employment taxes. The amount depends on your business profit and the salary you assign yourself. Generally, the election makes sense when your LLC profits exceed $40,000–$50,000 per year.
Are there limitations on when I can file Form 2553?
Yes. There are certain limitations on when you can file Form 2553. To have the election apply for the current tax year, you must file within 2 months and 15 days of the start of that tax year. Missing this deadline may mean waiting until the following tax year.
Is an S Corp election available for most LLCs?
Yes. S Corporation Tax Elections are available for most LLCs. However, there are some restrictions: you must have fewer than 100 shareholders, all shareholders must be U.S. citizens or residents, and you can only have one class of stock. For more information, speak to your accountant or tax advisor.
What does StartBrandz charge for this service?
StartBrandz charges a flat $149 service fee to prepare and file your Form 2553 with the IRS. There is no state filing fee for this service, as Form 2553 is a federal IRS election.