S-Corporation Election
An IRS tax classification (not a separate entity) that can save self-employment tax for profitable LLCs and Sole Props.
What it is
An S-Corp election (Form 2553) tells the IRS to tax your LLC or corporation as an S-Corporation. The business itself doesn't pay federal income tax; profits flow through to your personal return — but unlike a Sole Prop or default LLC, only your 'reasonable salary' is hit with the 15.3% Self-Employment / FICA tax. Distributions above salary are exempt.
Why owners do it
If your business clears roughly $50k–$80k+ of profit beyond what you'd pay yourself as a salary, the FICA savings on distributions usually exceed the added cost of payroll, bookkeeping, and a separate tax return.
How the math works
Example: $200k profit. Reasonable salary = $90k (FICA on $90k = ~$13,770). Distributions = $110k (no FICA). vs. Sole Prop where the entire $200k is hit with SE tax up to the wage base. Savings: typically $8k–$15k/yr.
Best fit for
- •Profitable single-member LLCs
- •Service businesses with high margins
- •Owners taking $50k+ in distributions
Watch out for
- •The salary must be 'reasonable' — too low triggers IRS reclassification.
- •Adds payroll, a separate 1120-S return, and state franchise fees.
- •Limits some retirement plan contributions vs. Sole Prop SEP-IRA.
Educational only — not tax, legal, or investment advice. Talk through your specific situation with a qualified advisor.