Key Takeaways

  • An LLC taxed as an S corp keeps its legal structure but changes its tax treatment to reduce self-employment taxes and allow flexible income distribution.
  • To elect S corp status, LLCs must file Form 8832 and Form 2553 with the IRS and meet eligibility requirements (e.g., ≤100 members, one class of ownership).
  • Benefits include tax savings on self-employment taxes, pass-through taxation, and potentially greater credibility with investors.
  • However, this election also introduces stricter IRS compliance, reasonable salary requirements, and added administrative costs.
  • The election is most beneficial for LLCs earning consistent profits above $80,000–$100,000, where payroll and tax savings outweigh compliance costs.

Having your LLC taxed as an S corp provides numerous benefits. By seeking corporate election, your LLC can avoid double taxation while minimizing tax liability. Your company will still operate as an LLC but will be treated as a corporation for tax purposes. Because there is no tax classification for LLCs, these entities are treated as sole proprietorships or partnerships by default. However, an LLC can also be taxed as an S corporation. 

Electing LLC As an S Corp 

Many business owners often wonder which option is best for tax purposes — an LLC or an S corporation. But you do not need to choose. You can set up your company as an LLC and then seek S corporation election. If you currently operate an LLC and your payroll taxes are high, S corporation election may be an ideal solution. 

To be treated as a corporation for tax purposes, you need to file Form 8832 and Form 2553 with the IRS. Since setting up an LLC is fairly straightforward, this option gives you the best of both worlds. You will be able to take advantage of the LLC's ease of administration and the tax benefits of an S corporation. 

However, it is important to note that S corporation is only allowed if:

  • Your LLC has no more than 100 shareholders
  • None of the shareholders are nonresident aliens
  • Your LLC has only one class of stock
  • None of the shareholders are other partnerships or corporations

Please note that election can only take effect within 75 days prior and up to 12 months after you have filed for election. Once you change the status of your LLC, the legal status of your company will remain the same. This means that you will still function as an LLC but will prepare your taxes as an S corp. 

Steps to Elect S Corporation Tax Status for an LLC

Once you’ve decided that being taxed as an S corp makes sense for your LLC, follow these steps to file the election properly:

  1. Confirm Eligibility:
    Your LLC must meet IRS S corporation criteria:
    • Have 100 or fewer members.
    • All members must be U.S. citizens or resident aliens.
    • The LLC must have only one class of ownership interest (equal voting rights and profit distribution).
    • Members must be individuals, not partnerships, corporations, or certain trusts.
  2. File IRS Forms:
    • Form 8832 (Entity Classification Election): Used to have the LLC treated as a corporation for tax purposes.
    • Form 2553 (Election by a Small Business Corporation): Used to elect S corp status after corporate classification.
      Both must generally be filed within 75 days of formation or within the first 75 days of the tax year you want the election to take effect.
  3. Set Up Payroll:
    As an S corp, you must classify yourself (and other member-employees) as employees who receive a reasonable salary. The IRS requires this to prevent tax avoidance on self-employment income.
  4. Maintain Ongoing Compliance:
    • File Form 1120-S annually for S corporation returns.
    • Issue Schedule K-1s to members to report income and distributions.
    • Keep records of meeting minutes, ownership changes, and salary adjustments.
  5. State-Level Filings:
    Some states, like California and New York, require additional forms or fees for LLCs electing S corp status. Always verify with your state tax agency before filing.

Benefits of Electing the LLC As an S Corporation

When it comes to the legal obligations of your business, your enterprise will be treated as an LLC rather than as a corporation. This offers a number of benefits including ease of administration, fewer forms, lower start-up costs, fewer formal meetings, and more. But being taxed as an S corporation, your LLC will enjoy pass-through taxation like partnerships or sole proprietorships. 

Though you won't have to deal with the administrative hassles associated with a corporation, you will be treated as one for tax purposes. In the eyes of the IRS, you and your business are separate from one another. This means that you will benefit from the opportunities that minimize your company's overall tax liability. 

If your LLC's net income is high, then you should consider being taxed as a corporation. This way you won't have to report all of your business income on your personal tax return. Because the highest personal tax rate is higher than the highest corporate rate, your taxes will be significantly lower. 

Tax Advantages of Having Your LLC Taxed as an S Corp

Choosing to have your LLC taxed as an S corp can yield major tax savings when your business generates significant income. The biggest advantage lies in how self-employment taxes are calculated.

  • Reduced Self-Employment Taxes:
    In a standard LLC, all profits are subject to the 15.3% self-employment tax. As an S corp, only the salary portion of your income is subject to those taxes. The remainder, distributed as dividends, is not taxed for Social Security or Medicare, offering substantial savings for higher-earning LLCs.
  • Pass-Through Taxation Maintained:
    Even with S corp status, income still “passes through” to members’ individual returns, avoiding double taxation seen in C corporations.
  • Business Credibility and Flexibility:
    S corp treatment may improve credibility with investors and lenders by reflecting a structured payroll and formal governance, while retaining LLC liability protection.
  • Potential for Retirement and Health Benefits:
    Owners who receive wages through the corporation can access retirement plans (e.g., 401(k)) and health insurance deductions through payroll, often resulting in further tax deductions.

LLC and S Corp Similarities and Differences

Owners of an LLC or S corp benefit from pass-through income and limited liability protection. LLC provides greater ease of administration and operation. An S corp offers greater flexibility in regards to methods of income payout to its owners, which can take form of wages, salaries, or distributions. An S corporation also trumps an LLC for tax planning purposes. 

For example, before you seek corporate election, your LLC's entire net income will be taxed at 15.3 percent towards Social Security and Medicare. But when you are considered an S corporation for tax purposes, you will only pay self-employment tax on the salary that you receive. The remaining profits are not subject to self-employment tax and are distributed among shareholders.

Once you have considered both options, you can discuss the details with your attorney. When first seeking S corporation election, due diligence can ensure that there are fewer complications down the road. This is particularly important for companies with multiple owners and shareholders.

Disadvantages and Limitations of Electing S Corp Status

While an LLC taxed as an S corp can lower taxes, it’s not the right fit for everyone. According to The Tax Adviser, LLCs should carefully consider potential drawbacks before making the election.

  1. Increased Administrative Costs:
    S corp LLCs must run payroll, file quarterly employment taxes, and maintain corporate records. These compliance requirements can add hundreds to thousands of dollars annually in accounting and payroll service fees.
  2. Reasonable Compensation Requirement:
    The IRS closely scrutinizes S corp owner salaries. Paying yourself too little to avoid employment tax can trigger audits and back tax penalties.
  3. Profit Threshold for Savings:
    The tax benefits only materialize when the LLC earns consistent profits above roughly $80,000–$100,000 annually. Smaller businesses may find compliance costs outweigh potential tax savings.
  4. Ownership Restrictions:
    Non-U.S. residents, other LLCs, and corporations cannot own shares in an S corp, which may limit growth and investment flexibility.
  5. State Tax Variations:
    Some states, such as California, impose minimum franchise taxes or additional S corp fees that can reduce overall savings. For example, California levies a 1.5% S corporation tax in addition to its $800 annual franchise tax.
  6. Loss of Flexibility in Allocating Profits:
    Unlike multi-member LLCs, which can allocate profits disproportionately among members, S corps must distribute profits strictly based on ownership percentage.

When an LLC Should Consider S Corp Election

An S corp election may be worth it if your business:

  • Earns steady profits above $80,000.
  • Has multiple owners actively working in the business.
  • Plans to reinvest earnings while saving on payroll taxes.
  • Can handle additional tax filings and bookkeeping costs.

If your business is still in the early stages or has variable income, maintaining the default LLC tax classification (sole proprietorship or partnership) may be more practical until profits stabilize.

Frequently Asked Questions

1. What does it mean for an LLC to be taxed as an S corp? 

It means your LLC keeps its legal structure but is treated as an S corporation for tax purposes. This lets you split income into salary and distributions to reduce self-employment taxes.

2. How do I file to have my LLC taxed as an S corp?

File IRS Form 8832 to elect corporate tax treatment and Form 2553 to elect S corp status, generally within 75 days of formation or the start of the tax year.

3. What are the main benefits of S corp election for LLCs?

Tax savings from reduced self-employment taxes, continued pass-through taxation, and potential eligibility for employee benefits like retirement and health plans.

4. What are the drawbacks of having an LLC taxed as an S corp?

Higher administrative costs, stricter IRS requirements for “reasonable compensation,” and ownership limitations that may restrict investment or expansion.

5. Is an S corp election right for all LLCs? 

No. It’s best for LLCs earning stable, high profits where the savings from reduced payroll taxes exceed the costs of compliance and payroll management.

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