All About the S-Corp Election

See exactly how an S-corp election would impact your business — with your own numbers, side by side.

What it is

A way of taxing LLC business owners more efficiently. It's designed as a "next step" for sole-proprietorship LLCs — once a business starts to become more legitimate in the eyes of the IRS and can demonstrate it has "earned" the ability to save extra money on taxes.

How it works

Without the S-corp election, all of your profit is seen as self-employment incomeIncome from a business you actively run, taxed as if you're both the worker and the employer — meaning you owe both halves of Social Security and Medicare.. And with that, you owe self-employment taxes15.3% combined — both halves of Social Security and Medicare, since you're effectively employer and employee. on top of regular income tax — because the government sees all of the profit as solely your money.
S-corp status separates your business from you as an individual — so it no longer taxes you on everything the business makes, just the money you take home (eliminating the 15.3% self-employment tax as well).

When should you switch?

There's no right or wrong answer, but here's some guidance.

Conservative approach

If you're hesitant to change your existing structure, the clearest signal you'll start saving money is when your business generates enough revenue to pay yourself a reasonable salaryA salary that reflects what someone else would earn doing the same work — typically 30–60% of profit., and when your business accounts are fully separated from your personal life.

Possible downsidesMissing out on significant tax savings you're entitled to.

Bold approach

If you're anticipating your business growing rapidly enough that you'll hit that "reasonable salary" threshold by the end of the year.

Possible downsidesIf your revenue isn't yet high enough to actually save in taxes, the extra $2,000–5,000 in S-corp operating costs aren't worth it. And if your business is still intermingled with your personal life, the IRS could revoke the status if they audit you.

The middle ground

It will always feel a little scary, betting on yourself and stepping into the next level of business ownership. But if you've had relatively stable, consistent profits and you're planning to stay with your business and keep growing, it's worth taking the next step.

Possible downsidesIf something unexpected happens, you have options — revoke your status, late-apply for the next year, or make changes the following tax year. It's relatively low-stakes, with huge potential for extra savings.

Calculator

See exactly how this election could affect your business.

Late election for 2026: Form 2553 was due March 15, 2026. The IRS's Rev Proc 2013-30Lets you file a late S-corp election with a "reasonable cause" statement — usually granted, but not automatic. IRS guidance. lets you file late with a reasonable-cause statement — usually granted, but not automatic.

Your business basics

Business structure

About you

Filing status

State

Net business incomeTotal revenue minus all business expenses — the bottom line of your Profit & Loss statement. (annual, before any owner pay)

Today

As an LLC

How you pay yourself

AmountThe annual amount you transfer out of the business into your personal accounts. Estimate how much you transfer out of the business into your personal accounts.

Your take-home$0

What you pay in tax

Self-employment tax15.3% on your business profit — both halves of Social Security and Medicare, since you're effectively employer and employee.$0

Federal income taxIncome tax on your business profit after a half-SE-tax adjustment and any QBI deduction.$0

Total tax$0

After electing

As an S-Corp

Same money, split two ways

SalaryThe W-2 paycheck you'd pay yourself under S-corp — most owners land somewhere between 30–60% of profit, but it's up to you.

DistributionThe S-corp version of an owner's draw — auto-filled to match your LLC take-home minus salary, so the comparison stays apples-to-apples. Salary + Distribution adds up to your LLC take-home — same money, just classified differently.

Your take-home$0

What you'd pay in tax

FICASocial Security and Medicare on your salary — same 15.3% as SE tax, but only on the salary portion. (employer + employee)$0

Federal income taxOften higher than LLC because the 20% QBI deduction only applies to the distribution portion, not your salary.$0

S-corp operating costs (payroll, prep, fees)$0

Total tax + costs$0

Estimated annual savings

Enter your numbers above (or load an example) to see your estimate.

Finding the right ratio

Reasonable salary is a range, not a single number. Most owners choose somewhere between 30–60% of profit.

S-corp operating costs

S-corp businesses often have additional operating costs, often between $500–2,000 annually. These are the typical changes businesses faceFor exact figures in your area, check your state Department of Revenue and local business licensing office., not personalized advice or estimates.

Payroll serviceRuns your W-2 paycheck, withholding, and filings — typically $40–60/month for a solo S-corp. (annual)

1120S tax prepThe S-corp's separate tax return — national average prep $800–1,500.

State S-corp fee est

Unemployment insurance (SUTA) est

What can go right, what can go wrong

No tax move is risk-free. Here's the realistic spread of outcomes — so you go in with eyes open, not just a savings number.

✓ Best case

Steady savings every yearTypical $3–10k+ annually at the median owner-income range, growing as your income grows. Five years of savings can easily clear $25k.
Set & forgetIf you run payroll yourself, it takes an average of 20 min/month, once you're set up. If you outsource it, it's one more task off your plate.
More retirement flexibilityW-2 wages let you contribute to a Solo 401(k) more cleanly — including the employer match portion.
More legitimacyLenders, larger contracts, and corporate clients tend to take a corporation with payroll more seriously than a sole prop. It signals operational maturity.

! Worst case

Salary too low → IRS auditIf your salary isn't defensible, the IRS can reclassify distributions as wages — back FICA + penalties (typically ~5–25%) + interest. This can wipe out years of savings, so a reasonable salary is non-negotiable.
State surprisesSome statesIf you've selected your state in the calculator above, those rules are already factored into your estimate. charge additional fees or taxes, or may not even recognize federal S-corp status. Look into your state for good measure.
Income drops below break-evenYou're stuck paying $1,500–2,500/yr in payroll + prep + state fees until you formally revoke. Revocation is allowed but takes a tax year to take effect.
Setup mistakes year oneMissed payroll deposits = penalties (2–15% of the missed amount). A late 2553 election rejected = full year as a Schedule C while still paying the S-corp setup costs.
Health insurance done wrongIf your premiums aren't reclassified as 2% shareholderAn S-corp owner holding more than 2% of shares — health premiums must run through W-2 wages to stay deductible. wages on your W-2, you can lose the deduction. Your payroll provider handles this — but confirm it.

Things to know before you file

Reasonable salary is a range, not a number

No single right figure. As long as you're defensible for your role and industry, you're fine — and you can adjust year to year. Strategic moves: lean lower if you need to qualify for income-based government programs, higher if you're trying to max retirement contributions or build stronger Social Security credits for later.

Why federal income tax goes up when you elect

The 20% QBI deduction (Section 199A) applies to qualified business income. As an LLC, that's your full profit (less half SE tax). As an S-corp, it's only the distribution portion — your salary doesn't qualify. So your fed income tax usually rises a bit. The FICA savings on the distribution still produce a net win, but it's why the savings are smaller than "15.3% × your distribution" would suggest.

Health insurance premiums move through payroll

If you currently deduct self-employed health insurance, those premiums need to be added to your W-2 as a 2% shareholder benefit. You still get the deduction — it just flows through payroll. Your payroll provider configures this once.

The election is reversible

If your situation changes, you can revoke S-corp status. The math usually still works above ~$40–50k of consistent profit, so minor income dips rarely require revoking.

Audit risk doesn't go up just because you elected

The IRS doesn't flag the election itself — they flag patterns: a $1/yr salary on $300k of profit, expenses that don't match your business, mixing personal and business spending. A defensible salary plus clean books keep you off their radar.

Partners don't lose money — everyone wins independently

In a multi-member LLC, each partner sets their own salary and distribution amounts on their share of the profit. Payroll tax was always being paid; the election just shifts which dollars get hit. Each partner sees proportional savings on their own share.

Year one feels heavier than years two plus

First year: setting up payroll, filing the 2553, restructuring health insurance, learning the rhythm of W-2 + distribution. After that, it's automatic. The first 1120S return is the most work; after that they're routine.