Step-by-step · 3 min read
Electing S corp status
An S corp election changes how your business is taxed, not what it is legally. As a sole proprietor or single-member LLC, all your profit is subject to self-employment tax of about 15.3% up to the Social Security wage base. As an S corp, you pay yourself a reasonable salary through payroll, and the remaining profit passes through without self-employment tax.
It usually starts to make sense once profit reaches roughly $80,000 to $100,000, after the cost of payroll, a separate return and any state fees.
- Who it fits
- Profitable LLCs and sole proprietors paying a lot of self-employment tax.
- Usually not a fit
- Businesses with low or very uneven profit, or with foreign or corporate owners.
- Figures
- 2026 tax year
The key rule
File Form 2553 within two months and 15 days of the start of the tax year it should apply to. For a calendar year, that is March 15.
How it works
What changes after the election:
- You become an employee of your company and are paid through payroll, with withholding.
- The business files Form 1120-S by March 15 and gives each owner a K-1.
- Profit above your salary is distributed to you without payroll tax.
- Health insurance, retirement contributions and home office reimbursements follow specific S corp rules.
7 steps
Confirm it pays off
We compare the payroll tax saved with the cost of payroll, the extra return and state taxes. California, for example, charges S corps 1.5% of net income with an $800 minimum.
Check eligibility
No more than 100 shareholders, one class of stock, and only eligible owners such as US citizens and residents and certain trusts.
File Form 2553
All shareholders sign. We file it and keep the IRS acceptance letter (CP261).
Register for payroll
Choose a payroll provider and register for state payroll tax accounts.
Set your salary
See the S corp salary guide. Pay it regularly through the year.
Change how you get paid
Salary through payroll, then distributions of remaining profit from the business account, roughly in proportion to ownership.
File the 1120-S
The S corp files its own return by March 15 and gives you a K-1 for your personal return.
Example
Payroll tax saved
Your LLC earns $180,000 of profit. As a sole proprietor, nearly all of it is subject to self-employment tax. As an S corp paying you a $90,000 salary, payroll tax applies to the $90,000 only. The remaining $90,000 avoids about $13,000 of payroll tax, before the extra costs of running payroll.
Common mistakes
- Late elections can often be fixed with relief procedures. Tell us early if a deadline passed.
- Taking distributions without running payroll first.
- Unequal distributions to owners can threaten the one-class-of-stock rule.
Key dates
- March 15
- Form 2553 deadline for a calendar-year election, and the 1120-S filing deadline.
- Each payroll date
- Salary and withholding.
Questions we hear
Do I need to form a new company?
No. An existing LLC can elect S corp status.
What to send us
- Formation documents and EIN
- Year-to-date profit and loss
- Signed Form 2553
Upload them to your client portal.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.