A limited liability company (LLC) electing S corporation status for tax purposes could lessen a business’ tax bill by thousands of dollars. An LLC pays a 15% self-employment tax on profits, while an S-corp only pays 15% on the owner’s salary, not the entire profit. You can file IRS Form 2553 to elect as an S-corp.
IRS form 2553 is available for you to file on your own through the IRS. If you’d like to skip the hassle of dealing with the IRS’s clunky system, consider using an online legal service. IncFile will file IRS form 2553 on behalf of your business for only $50. Additionally, IncFile provides a free calculator to help you understand how much money you can save by having your LLC taxed as an S-corp. File your LLC as an S-corp today with IncFile.
How Electing an LLC as an S-corp Works
All businesses pay taxes on their profit. However, the amount of taxes a business owes may depend on the type of entity it’s registered as. An LLC pays a self-employment tax of 15.3% on its profits along with a federal and state income tax (if applicable). An S-corp pays a self-employment tax as well. The federal and state taxes are the same for an LLC and D-corp.
When a business is taxed as an S-corp, the 15.3% self-employment tax is only a tax on the owner’s salary. The rest of the profit is considered a dividend payout. Only the owner’s salary is taxed at the 15% employment tax and the dividend is not. The owner’s salary must be a fair salary, which the IRS defines as “reasonable compensation.” A fair salary would be what a full-time position in a comparable business earns in a year.
For example, if your LLC earns a $70,000 profit, you would owe $10,710 (15.3% of profits) in self-employment tax. However, if you decide to elect S-corp status for your LLC, your tax bill would be lower. Let’s say the “reasonable compensation” for your position is $40,000 a year. That would leave $30,000 ($70,000 – $40,000) as a self-employment tax-free dividend. The self-employment taxes owed would be 15% of $40,000, which is $6,120. You would receive a total tax savings of $4,590 ($10,710 – $6,120) by electing an S-corp status.
To take advantage of this potential tax savings, you must file IRS Form 2553 by March 15 of the corresponding tax year. Form 2553 shows the IRS that your LLC will be electing S-corp status. The IRS estimates it takes about four hours to prepare and transmit the form. IncFile will file the form with the IRS on your behalf for $50. It’s important to note that an LLC electing S-corp status is for tax purposes only and doesn’t affect other aspects of the business.
Who Should Tax Their LLC As An S-corp
The IRS has requirements on the type of business that may elect an S-corp. It’s best to consult a business attorney or tax professional if you’re concerned about any of the requirements.
A business must abide by the following guidelines to elect as S-corp:
- Must be a domestic corporation or entity.
- It cannot have more than 100 shareholders.
- It cannot have nonresident alien shareholders.
- Cannot be an ineligible corporation (there are four types, such as a domestic international sales-corporation).
The IRS’s website outlines the full requirements for LLCs electing S-corp status. Form 2553 is available with directions and guidance.
Costs Of Electing S-Corp Status
Electing an LLC as an S-corp for tax purposes is a good idea for most LLC owners. However, not all LLC owners want to file their taxes as an S-corp because it requires additional administrative overhead. To be taxed as an S-corp, the business owner has to set up a monthly payroll to pay themselves. Also, they have to submit payroll taxes to the IRS. This monthly task increases admin time within the business.
Additionally, your account will have to file your business’s tax returns differently. This may result in a higher tax return filing fee. Make sure the tax savings outweigh both of the administrative time and fee increases. For example, if your business profit is $40,000 and you pay yourself a $38,000 salary, the tax savings would only be about $300. Would your time and the additional filing fee be worth the $300 saved?
Advantages & Disadvantages of LLCs Electing S-corp Status
There are a few advantages and disadvantages of taxing an LLC as an S-corp. The advantages center around saving money and forcing a business to plan for their upcoming tax liability. The main disadvantage is wasted time and effort if the business performs poorly and has a small profit. This would result in all the profit going to the owner’s salary and no resulting tax reduction.
Pros of an LLC Electing S-corp Status
Here are the advantages of electing an LLC as S-corp status:
- Save money on taxes: The main reason LLCs elect S-corp status is to save money on its taxes, specifically to pay less self-employment tax on profits.
- Tax planning: Electing as an S-corp requires a business to pay quarterly payroll taxes. It’s beneficial to plan and pay taxes in advance to minimize the overall tax liability at the end of the year.
- Qualified business income deduction: The Tax Cuts and Jobs Act bill gives pass-through entities a 20% “qualified business income deduction.” It’s best to discuss how much money you can save (if any) with a tax professional.
Here are the disadvantages of electing an LLC as S-corp status:
- Submit payroll taxes: Since the business owner is paying themselves a salary, they have to spend time submitting quarterly payroll taxes.
- Increased return filing fee: The professional who files the business’s tax returns may charge a higher fee for preparing the S-corp paperwork.
- Possible no tax savings: If the business earns less money than expected, the business owner may be forced to pay themselves all of the profit in salary, which would result is no tax savings compared to the LLC.
- Time spent on Form 2553: It will take several hours to fill out and submit the information required to be taxed as an S-corp. You may find your time was better spent on performing other tasks for the business.
How To Elect Your LLC As An S-corp
To have your LLC taxed as S-corp, you must declare it to the IRS by submitting Form 2553 by March 15 of the tax year for which you’re filing. If you’re forming your LLC for the first time, it must be within 75 days after the business registration date. Instructions for the form are available on the IRS website. The IRS estimates that it takes about four hours to prepare and submit the form.
Depending on what state your business is registered in, you will have to fax or mail the form to a different address. For example, businesses registered in Connecticut, Michigan, and South Carolina have to mail the form to an IRS office in Kansas City, Missouri. Whereas businesses registered in Florida, Nebraska, and Texas have to mail the form to an office in Utah. Check with the IRS each year regarding the location to which you should send your form; it may change year to year.
Frequently Asked Questions (FAQs) About LLCs Electing S-corp Status
This section includes the most frequently asked questions about an LLC electing S-corp status. If you don’t see your question, head over to our forum and post your question there. We have a whole team of industry experts who answer questions from small business owners every day.
Can a single-member LLC elect S-corp status?
Yes, a single member LLC can elect S-corp status. There are restrictions on the type of LLCs that can elect S-corp status for tax purposes, however, a single member LLC is not one of the restrictions.
How is S-corp status elected?
The s-corp status is elected by submitting IRS Form 2553 no more than two months and 15 days after the beginning of the tax year. The IRS estimates it takes about four hours to prepare and submit the form. It’s important to remember that if you do submit IRS form 2553, you must pay yourself a monthly salary. Additionally, you must pay quarterly payroll taxes to the IRS.
When can I elect S-corp status?
You can elect S-corp status no more than two months and 15 days after the business’s tax year started. For most LLCs, that is March 15. Additionally, if you register a new business in the middle of a tax year, you have 75 days to submit IRS form 2553 and declare S-corp status for your LLC.
How long does it take to get s-corp status?
According to the IRS, it takes about two months after submitting IRS Form 2553 to get S-corp status. Before getting approved, it’s wise to start preparing payroll taxes for the business owner’s salary because they will need to be paid quarterly.
How is S-corp income taxed?
S-corp income is taxed several different ways. First, expenses are deducted from income, which results in the business’s profit. The owner’s salary is deducted from the profit and taxed at 15% for the self-employment tax. The amount of profit left after the owner’s salary is deducted is called a dividend. The dividend is not subject to the 15% self-employment tax. However, both the owner’s salary and dividend are taxed at the federal income tax rate (and state if applicable).
Having an LLC elect S-corp status benefits most business owners, because they pay less self-employment tax. To get an LLC taxed as S-corp, you must submit IRS Form 2553 no later than March 15 of the tax year. The average LLC business owner can save thousands of dollars in taxes by making the S-corp declaration.
If you would like to save time submitting IRS tax form 2553, consider paying an online legal service to do it for you. IncFile is a popular online legal service that will prepare and file form 2553 for only $50. Additionally, if you haven’t registered your business with the state as an LLC, IncFile can assist with that as well. Sign up to get started with IncFile today.