LLC Taxed as an S-Corporation (Form 2553)

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What is an S-Corp? (definition)

S-Corp is short for S-Corporation, also known as an “S Corp”, “S Corporation”, or “Subchapter S Corporation”.

An S-Corporation is different from an LLC or Corporation (C-Corporation) in that it is a “tax entity”, not a legal entity formed at the state-level.

The term “tax entity” means it’s a tax classification status made with the IRS.

The S-Corporation election is made with the IRS and then “sits on top of” your legal entity; either your LLC or your C-Corporation.

An S-Corporation is a “pass through” tax entity, so it is not subject to double taxation like a C-Corporation. Any income, losses, credits, and deductions flow through to the owners of an S-Corporation (called shareholders) and will be reported and paid for on their personal tax return.

Just like an LLC and a C-Corporation, an S-Corporation offers personal liability protection to its owners. Their personal assets (like homes, vehicles, and bank accounts) are protected in the event of a lawsuit and cannot be used to pay off the debts or liabilities incurred by the S-Corporation.

A lot of people use the term “forming an S-Corporation” and this causes a lot of confusion.

“Forming” an S-Corp vs. “Setting up” an S-Corp

Again, unlike an LLC or a Corporation, which is a business entity created at the state-level, an S-Corporation is a tax entity selection made with the IRS.

Therefore, you can’t form an S-Corporation. Instead, you elect to have your already-formed entity taxed as an S-Corporation with the IRS.

Meaning, you first need to form an LLC or a Corporation (making the appropriate filing with your state’s Secretary of State office), then elect to have that entity taxed as an S-Corporation with the IRS.

I highlighted “taxed as” because that is the proper verb, not “form” an S-Corp. There is no filing in any of the 50 states to “form an S-Corp“. A better way to refer to this is “setting up an S-Corp“.

Again, “forming an S-Corp” simply means taking an existing entity and changing its tax status with the IRS.

Having said that, traditionally speaking, when people say “form an S-Corp”, they actually mean form a Corporation (also known as C-Corporation) with the state, then elect for the C-Corporation to be taxed as an S-Corporation by the IRS. However, an LLC can also elect to be taxed as an S-Corporation with the IRS, and is a very common tax classification made by LLCs whose net income begins approaching $75,000 to $100,000 per year.

Note: This lesson will focus on LLCs taxed as S-Corporations, not Corporations taxed as S-Corporations.

LLC Tax Classification with the IRS

LLCs have a default tax status with the IRS, depending on how many members there are:

  • If you have a Single-Member LLC (1 owner), then the IRS will tax it as a Disregarded Entity/Sole Proprietorship.
  • If you have a Multi-Member LLC (2 or more owners), then the IRS will tax it as a Partnership instead.

Alternatively, you can tell the IRS to tax you as a Corporation by filing an additional form after getting an EIN for your LLC. There are two different ways you can have your LLC taxed as a Corporation:

  • You can have your LLC taxed as an S-Corporation by filing Form 2553 (which we’ll discuss in this lesson).
  • You can have your LLC taxed as a C-Corporation by filing Form 8832.

S-Corporations are becoming very popular for small business owners (with adequate net income), but S-Corporations are also the least understood (and people usually jump into them too fast).

Let’s now discuss the S-Corporation advantages and disadvantages.

S-Corp Benefits

The primary benefit of an LLC taxed as an S-Corporation is saving money on self-employment taxes.

Self-employment tax refers to Social Security and Medicare taxes, which total 15.3% of your net income (income minus expenses). The breakdown is 12.4% for Social Security tax and 2.9% for Medicare tax.

These taxes are paid to the Social Security Administration and you’ll report self-employment tax as a part of your personal federal tax return (Form 1040) on Schedule SE.

The way an S-Corporation saves money on self-employment taxes is by “splitting your income” into two groups:

  • salary (also called wage or payroll) and
  • distribution (also called dividend or profit)

Once your LLC is taxed as an S-Corporation you become an “employee-owner” (also referred to as a “shareholder-owner”). You both own your company and work for your company.

With this “income splitting”, you only have to pay the 15.3% self-employment tax on your salary. Your extra money left over (called distributions) is not subject to self-employment tax.

This is unlike an LLC taxed as a Sole Proprietorship or Partnership. In these tax classifications, you pay self-employment tax on all of your net income and there is no option to split your income and save money on self-employment tax.

However, the IRS is not an idiot and they know that there is a slight loophole in the S-Corporation tax election. Therefore, they require you to take what’s called a “reasonable salary”, which we’ll discuss more in a bit.

Let’s first look at an example:

Let’s say your LLC is a web design business and has a gross income of $120,000 and your expenses are $20,000. Your net income is therefore $100,000.

You and your accountant decide on a reasonable salary of $60,000 per year, which is average for your industry.

You’ll end up paying 15.3% self-employment tax on the $60,000 wage, but the remaining $40,000 in distributions (profit) will not be subject to the 15.3% self-employment tax, therefore you’ll save $6,120 in taxes.

Now it’s not pure tax savings though. Your administrative costs will offset your savings a little, however, for most businesses with a net income of $75,000 to $100,000 per year (or more), the tax savings are usually still greater than the expenses.

Here are your S-Corp administrative responsibilities:

  • you have to run payroll,
  • you have to file quarterly payroll returns (federal and state),
  • you have to keep accurate books and a balance sheet, and
  • you should hire an accountant to file your corporate tax return (Form 1120S, K-1s for shareholders/owners, and any additional Schedules)

Also, depending on the number of employees you have and in what state you’re located, you’ll also need to take care of federal unemployment insurance, state unemployment insurance, and workers’ compensation insurance.

Note: Payroll is complex. There are 5-10 federal payroll forms and 5-10 state payroll forms that need to be filed. We recommend asking your accountant for a recommendation or using a payroll company, like Gusto Payroll.

The costs of the above will vary depending on your business and situation, but as a per-year-ballpark, payroll can cost $400 to $600, accounting and bookkeeping also at $400 to $600, and tax prep services paid to your accountant can range from $700 to $1,000.

So overall, your administrative costs may be $1,500 to $2,500 (maybe up to $3,000 in some cases). So you spend $3,000 to save $6,120, for a net tax savings of $3,120.

And granted, the higher your company’s profits, the more you can save on self-employment tax.

If you need help with payroll, we recommend Gusto Payroll. And to manage your accounting, we recommend Xero or QuickBooks.

But that’s not all there is to consider. There are also disadvantages to S-Corp taxation.

Disadvantages of S-Corporation

Although you can save money with an S-Corporation, it’s important to understand the other side of the coin.

Higher audit risk

S-Corporations are more closely watched by the IRS so make sure you are actually taking a reasonable salary and filing your federal and state taxes correctly.

Social Security benefits

Your Social Security benefits are based on the salary you take over your working career. In an S-Corporation, that means your Social Security benefits are based on the salary you pay yourself. The distribution of profits you pay to yourself does not count. So although you’ll be saving money on self-employment taxes by taking a lower salary now, you could be reducing your Social Security benefits in the future.

Lower mortgage pre-approval

When purchasing a home with a traditional mortgage, the bank will look at your income to determine how much you can afford. They’ll only be looking at the salary paid by your S-Corporation and not the dividends. So making your salary too low could hurt your ability to purchase a more expensive home.

Self-employed retirement account contributions

If you have a self-employed retirement account (like an SEP, simple IRA, solo 401(k), or Keoghs), the contributions you can make are based on the salary your S-Corporation pays you. Not only does making these retirement account contributions reduce your tax burden, they also help you maximize your retirement funds. For additional reading, see this article by The Tax Advisor.

Recommendation: As you can see, the S-Corporation tax savings are not always 100% beneficial. We recommend speaking with an accountant regarding saving money on taxes while balancing that with long-term tax and retirement strategies.

S-Corporation owner-employee & reasonable salary

At this point, you may be thinking, “How do I determine a reasonable salary?”

Here are some factors to consider:

  • experience, training, and certifications
  • duties and responsibilities
  • history of prior dividend payouts
  • the time and effort you provide to the business
  • how much you pay regular employees (if applicable)
  • what similar business pay employees for similar services
  • if there is use of a formula to determine compensation

As a general rule of thumb, it’s good to document how your time is spent in the business, and what the appropriate salary is for each of those activities.

For example, let’s say you spend 50% of your time on web design, 25% on marketing, and 25% on customer service. And let’s also assume you work a 40-hour workweek and work 50 weeks per year (taking a 2-week vacation).

Here’s a recommendation:

Visit two sites which list salaries, such as and

Find the salary of each role on the above 2 sites and average them out. We recommend printing/saving your findings for good documentation.

In our example:

  • a web designer’s average salary came to $65,000 per year,
  • a marketing coordinator’s salary came to $46,500 per year, and
  • a customer service representative’s salary came to $32,600 per year.

We then took 50% of the web design salary ($32,500), 25% of the marketing coordinator salary ($11,625), and 25% of the customer service representative salary ($8,150) to arrive at a total salary of $52,275.

Of course this is just an example. There are many factors to consider when determining your S-Corporation salary. We recommend speaking with your accountant, and however you determine your salary, make sure you document it in case of an audit in the future. It’s also advisable to draft and sign a compensation agreement between you and your S-Corporation.

General rules

Some tax advisors recommend keeping your distributions no more than 3x your salary. For example, if your net income is $150,000, your salary is $50,000 and your distributions are $100,000.

More conservative tax advisors say to keep your distributions at 50% of your net income. For example, if your net income is $150,000, your salary is $75,000 and your distributions are $75,000.

The IRS can reclassify distributions

On another note regarding S-Corporation reasonable compensation, it’s important to remember that if at some point, the IRS determines that your salary is not reasonable, they can reclassify the distributions you already took, tax them, and add on penalties, interest, and fines.

These federal cases show the IRS’ ability to reclassify distributions:

When to file Form 2553 (timing)

The timing for filing Form 2553 will depend on whether your LLC is newly-formed or already existing.

For already-existing LLCs:

If you want to make your LLC’s S-Corp status effective for a given tax year, you have to file Form 2553 within 2 months and 15 days from the beginning of that year.

If you file beyond that given period, the effectivity will start the next tax year (unless you made a late election request and it was accepted by the IRS).

Example: Let’s assume your LLC’s next tax year starts on January 1st, 2024. Your LLC must file Form 2553 on or before March 15th, 2024. If you file within that period, then the S-Corp status takes effect for the entire 2024 tax year. If you file after March 15th, then the status takes effect in the 2025 tax year (unless you make a late election request and the IRS accepts it, then the status takes effect for the 2024 tax year.).

For newly-formed LLCs:

You have to file within 2 months and 15 days from the date of your LLC’s date of approval in order for the changes to take effect in its first tax year.

Example: If your LLC was approved on April 10th, 2024, then you have until June 25th, 2024 to file Form 2553 for the S-Corp status to take effect for the 2024 tax year. If you file after June 25th, then the status takes effect in the 2025 tax year (unless you make a late election request and the IRS accepts it, then the status takes effect for the 2024 tax year).

How do you know if your LLC is already-existing or newly-formed?

  • If your LLC has already had a prior tax year, then your LLC is already-existing.
  • If your LLC has not had a prior tax year, then your LLC is newly-formed.

Late election of S-Corp status

If you filed your Form 2553 beyond the two-month-and-15-day window but want your LLC’s S-Corp status to take effect for that current tax year, you must prove that the late filing was due to a “reasonable cause.”

So as long as you have a “reasonable cause” and your LLC meets the IRS requirements, the IRS will usually grant your LLC S-Corp status to take effect in its current tax year.

We recommend speaking with your accountant about the details, but you can see the common reasonable cause example of “blaming your accountant” below.

Special note to add in the top margin:
If you are making the S-Corp late election when filing Form 2553 (but don’t need to file Form 1120S), write “FILED PURSUANT TO REV. PROC. 2013-30” at the top of page 1 of Form 2553.

If you are making the S-Corp late election when filing Form 2553 along with Form 1120S, write “INCLUDES LATE ELECTION(S) FILED PURSUANT TO REV. PROC. 2013-30” at the top of page 1 of Form 1120S.

Don’t go S-Corp too fast

Although having your LLC taxed as an S-Corp sounds amazing at first glance, it’s important to proceed with caution and not move too fast.

Many small business owners may be able to save money on taxes by keeping their LLC in its default tax status (taxed as a Sole Proprietorship or taxed as a Partnership) for the first few years until net income increases.

You want to make sure your LLC is consistently hitting net income levels that are above what the LLC Member(s) reasonable salary would be.

Requirements for S-Corp

Note: In this context below (since your LLC will be taxed as an S-Corp), a shareholder of an S-Corporation is the same thing as an owner/member of an LLC.

In order for your LLC to be eligible to be taxed as an S-Corp, it must meet the following requirements:

1. US entity. Your LLC must be formed in the United States and cannot be a company that was formed or organized outside of the US.

2. 100 shareholders. You’ll often see this rule written as “your S-Corporation can’t have more than 100 shareholders”. In the context of an LLC taxed as an S-Corporation, this means your LLC cannot have more than 100 members.

3. Class of stock. The company can only have 1 class of stock. Sometimes companies have different classes of stock which have different rights and privileges. All shareholders (owners) of an S-Corporation must all receive the same privileges of ownership.

4. Eligible shareholders. Under the IRS rules, an S-Corporation can only have eligible owners/shareholders.

Who Can Own an S-Corp?

The following are allowed to be owners (shareholders) of an S-Corporation:

  • US citizen
  • US trust
  • US estate
  • US resident alien (must have Green Card/Form I-551 or pass “substantial presence test”)
  • US tax-exempt organizations (must qualify under 26 US Code § 401(a), 501(a), or 501(c)(3))

The following are not allowed to be owners (shareholders) of an S-Corporation:

Can a Foreigner Own an S-Corporation?

Yes, a foreigner can own a U.S. S-Corporation, but it depends on the type of “foreigner”.

For more information, please see: Can a foreigner own an S-Corporation?

Converting from LLC to S-Corp

A lot of our readers ask us how to convert an LLC to an S-Corporation. We just want to add this section as clarity.

Just like “forming an S-Corp” is not the correct expression, “converting from LLC to S-Corp” is also not the correct expression and it can lead to a lot of confusion.

The legal and state entity (the LLC) remains the same. You are just changing the way in which the IRS taxes your LLC. The LLC does not go away. Remember, by default, LLCs with 1 owner are taxed as a Sole Proprietorship and LLCs with 2 or more owners are taxed as a Partnership.

By filing Form 2553 with the IRS (instructions below) you are simply changing the default tax classification of the LLC (from either Sole Proprietorship or Partnership) to S-Corporation, under Subchapter S of the IRS Revenue Code.

Instructions: How to fill out Form 2553

Note: You can cross-reference any information listed below with the IRS’s Form 2553 instructions. As mentioned earlier, we recommend you work with an accountant on electing to have your LLC taxed as an S-Corporation. Besides filing Form 2553, you also need to take payroll, file payroll tax returns, file a corporate return for your S-Corporation (Form 1120S), and manage your books.

Additionally, the instructions below are for an LLC electing to be taxed as an S-Corp (not a Corporation electing to be taxed as an S-Corp).

Get started:
Download IRS Form 2553 and save to your computer.

If you’d also like to download a completed sample form, please download this file as well: LLC taxed as S-Corp Form 2553 example

Part 1 – Election Information


Enter your complete LLC name in this section.

Employer Identification Number (A):

Enter your LLC’s EIN Number in this section. You’ll need an EIN in order to make the S-Corporation tax election.

Street Address and City, Town, Zip:

Enter the street or mailing address for your LLC. This can be the same address you used when you applied for your EIN, but it doesn’t have to be. If this is an updated address you’re using with the IRS, check off the “address box” in D.

Date incorporated (B):

Enter the date your LLC was formed. You can find this date on your stamped and approved Articles of Organization (or Certificate of Organization or Certificate of Formation) or by searching your LLC name on your state’s LLC name search database.

State of incorporation (C):

Enter the state where you formed your LLC.

D (Changes):

If you’re using a new address with the IRS, check off the “address” box. If you’ve changed your LLC name with the state since forming your LLC, check off the “name” box.

E (Election is to be effective):

Enter the tax year that you’d like your LLC to be taxed as an S-Corp. For example, if you’d like your LLC to be taxed as an S-Corp in the 2024 tax year, enter “01/01/2024”.

F (Selected tax year):

Choose your tax year. Most filers check off the first box for “Calendar year”.

G (Treating members of a family as one shareholder):

This section applies if your LLC has more than 100 members (also known as your S-Corporation having more than 100 shareholders). If your S-Corporation has more than 100 shareholders, please review the instructions. For most filers, their S-Corporations do not have more than 100 shareholders, so this box will be left unchecked.

H (Name and title of officer):

Enter your contact information and title in case the IRS has any questions. For example, you can enter “John Doe, Member” or “John Doe, Owner”.

I (Phone number):

Enter your cell, office, or home telephone number.

Multi-line explanation section:

This multi-line section is only needed if you are making a late S-Corp election (after the due date). If that’s the case, you need to include a reason, and often, the IRS is fairly flexible on accepting Form 2553 after the deadline.

A common strategy to use is the “blame the accountant” method. Here is sample text you could use: “LLC intended to make the S-election. Accountant did not provide the recommendation on time.

Signature, Title and Date:

Enter “Member” or “Owner” for the title, and the date on which you are completing the form. After you print the form, make sure to sign it.

Part 1 – Election Information (continued) [page 2]

On page 2 you are going to list all of your LLC owners.

In column J, you’re going to list each person’s full name and address.

In column K, you’re going to have each person sign and enter today’s date.

In column L, you’re going to list the percentage of ownership and the date which the ownership was acquired. If you have 1 member in your LLC, the percentage would be 100%. If you have 2 members in your LLC, each person would enter 50%. For the date acquired, you can use the date your LLC was formed (which you also entered in box B).

In column M, list each person’s Social Security Number.

In column N, enter each person’s calendar year. This will be “12/31”.

For most filers, there is nothing else you need to do with the form. You can skip ahead to the mailing/fax instructions.

Part 2 – Selection of Fiscal Year (O, P, Q, and R):

This section does not apply to most filers, so they leave everything blank, however make sure to review your filing and speak to your accountant if anything in this section needs to be completed.

Part 3 – Qualified Subchapter S Trust (QSST):

This section does not apply to most filers, so they leave everything blank, however make sure to review your filing and speak to your accountant if anything in this section needs to be completed.

Where to mail or fax Form 2553

Once you complete Form 2553 and sign it, you’re ready to send it to the IRS. You can either send Form 2553 by mail or by fax.

Where you mail or fax Form 2553 is determined by the state where your LLC was formed.

Please visit the following page on the IRS’s website to determine where to mail or fax Form 2553.

Tip: For faster approval, fax Form 2553 to the IRS using a digital fax service such as ($10). They have great customer support and will help you set up your digital fax in just a few minutes.

S-Corp approval letter

Please allow 45 to 60 days for the IRS to mail you back your S-Corp election approval letter.

If your LLC’s S-Corp election is approved you will receive a CP261 Notice.

We recommend making a few copies of the CP261 Notice and keeping them with your LLC’s records. Make some physical copies as well as some digital copies.

If your LLC’s S-Corp election is denied you will receive a CP264 Notice. You’ll then need to speak with the IRS and/or your accountant to see what the cause was and if/when you should re-file Form 2553.

If you lose your CP261 Notice, you can also call the IRS (800-829-4933) and request an “S-Corp Verification Letter”, technically known as a 385C. The CP261 can only be generated once (it’s auto-generated internally at the IRS), however the CP261 and 385C have the same effect. The 385C will arrive by mail 7 to 14 days after you call.

IRS Form 1120S and other S-Corp Taxes

An S-Corporation is a “pass through” tax entity in that it doesn’t pay federal taxes at the corporate level. The profits, losses, credits, and deductions from the S-Corporation “flow through” to the individual shareholders’ (owners) personal tax return and they are responsible for paying the tax.

However, the S-Corporation still needs to file what’s known as an “informational return”. That includes filing Form 1120S as well as issue K-1s to each of the S-Corp shareholders.

For 90+% of LLCs which operate on the calendar year (Jan. 1 to Dec. 31), the S-Corp tax return will be due by March 15th each year. And like personal tax returns, if your S-Corporation needs an extension, you can file Form 7004.

There are also additional tax forms your S-Corporation must file in order to report taxes paid from payroll (withholding income tax, Social Security, and Medicare). This is filed on Form 941. And Form 940 will be used for federal unemployment tax.

The IRS is very strict about due dates and has the right to impose penalties if your S-Corp tax return is late (or missing information). If no tax is due and you need to file an informational return only the IRS can charge $195 per month per person. If there is a tax due, it’s $195 per month per person plus 5% of the unpaid tax for each month it’s late. This is just an overview though. For more info please see the “Interest and Penalties” section of Form 1120S instructions.

Calculating your S-Corporation’s tax obligations and correctly filing all IRS forms can be complicated, and if done improperly, can lead to IRS penalties, fines, and interest.

As mentioned throughout this lesson, we recommend you work closely with an accountant to make sure you file your S-Corporation taxes properly as well as keep your S-Corporation in compliance with any other IRS requirements.

State S-Corp Tax Filings

Depending on the state where you formed your LLC, you may also need to file an S-Corp state-level tax return (in addition to your federal return) as well as state unemployment insurance.

Please get in contact with your state’s Department of Revenue or speak to your accountant for details.

How an LLC can revoke its S-Corp election

If you currently have an LLC taxed as an S-Corp but you’d like to cancel this tax election with the IRS, this is called a “Voluntary Revocation of S-Corporation Status”.

You need to send 3 items to the IRS if your LLC wants to revoke its S-Corp status:

  • Letter of Revocation of S-Corporation Election
  • Statement of Consent of LLC Members for S Election Revocation
  • IRS Form 8832

You can find the download links and the instructions to the above forms in How to revoke an S-Corp election.

IRS Phone Number & Contact Information

If you have any questions regarding your LLC being taxed as an S-Corp, or how to fill out Form 2553, you can call the IRS at 800-829-4933. You can find additional IRS phone numbers at the IRS contact page.

IRS phone support is available from 7am to 7pm, Monday through Friday. For shorter hold time, we recommend calling earlier in the morning.

Matt Horwitz
Matt Horwitz
Matt Horwitz has been the leading expert on LLC education for the past decade. He founded LLC University in 2010 after realizing people needed simple and actionable instructions to start an LLC that other companies weren't offering. He's cited by Entrepreneur Magazine, Yahoo Finance, and the US Chamber of Commerce, and was featured by CNBC and InventRight.
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.

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160 comments on “LLC Taxed as S-Corp (Form 2553)”

Disclaimer: Nothing on this page shall be interpreted as legal or tax advice. Rules and regulations vary by location. They also change over time and are specific to your situation. Furthermore, this comment section is provided so people can share their thoughts and experience. Please consult a licensed professional if you have legal or tax questions.

  1. Hi Matt,

    The work that you are doing is helping people live their lives more happily, brother!

    I realize your niche is LLC, but I would like to try this question:

    How does the “S-Corp treatment” of a corporation differ from the “S-Corp treatment” of an LLC?

    Thank you in advance,

    • Thanks Sam! You’re very kind. For tax purposes, there is no difference. They are identical. Hope that helps :)

  2. Hi Matt,
    Thank you for your response. I am an accountant, I use QuickBook tracking all incomes and expenses. I also do my own taxes. I save a few grand because of my profession. Agree that electing an S Corp taxation will require me to do payroll, filing quarterly and annual filing with the Fed/state. My husband repairs the rentals and I do the finances. Do both of us have to take the salary under an S Corp? If so, the rentals would create net loss, which carries to 1040 and lowers our taxable income. Wouldn’t the S-corp be worth it? Would the IRS scrutinize our tax return if we continuously showing a net loss on our tax returns?

    • Hi Penny, that is great to hear about the savings. I would imagine S-Corp taxation is likely far easier for someone like yourself. I’m not sure about how the return would be looked at. But yes, if you are both owners of the S-Corp and provide “more than minor services” to the LLC/S-Corp, then a wage must be paid.

  3. I formed my LLC about two weeks ago and I am filling out new W-9s for my clients that require them. I am thinking about having my LLC treated as a S-corp, but I haven’t filled out the paperwork or gotten approved by the IRS yet. If I decided in the next two months to be treated as an S-Corp, will I have to update the W-9s again?

  4. Hi Mast,
    Thank you so much for providing most comprehensive and the easiest to understand article. In the residential business, you can take a large chuck of depreciation on the tax return. If the net income is less than $50k after depreciation and before salary, does this mean that it’s not worth converting from an llc to an S Corp? If I pay $50k reasonable salary, then the net income would be zero or negative. Please advise. Thank you!

    • Hi Penny, you’re very welcome. Thank you for the kind words. You are correct. It’s all about the net income. You want to make sure there is enough net income to justify the extra work and expense in converting to, and maintaining, an LLC taxed as an S-Corporation. Also, because of the IRS’s “60-month rule” (the inability to revoke the S-Corp election, unless the LLC meets one of two exceptions), then the LLC is forced to file as an S-Corporation for 5 years.

      Having personally experienced S-Corp taxation for a number of years, I found it quite stressful (there is extra paperwork and filing requirements and tax documents) and it costed about $3,000 per year for Quickbooks, a bookkeeper, payroll expenses, and accounting fees. Said another way, I recommend being fairly certain S-Corp election is the route to go before making the election. Hope that helps.

  5. Hi Matt
    Can 2 SMLLCs (SMLLC1 and SMLLC2) both taxed as S Corp. form an LLC3 equally owned by both(50% SMLLC1 &50% SMLLC2) and elect for the LLC3 to be taxed as S Corp. therefore sending K1 to each(SMLLC1 and SMLLC2) and then each SMLLC sending a k1 to their owners. Thank you

    • Hi Joseph, I’m not 100% sure. LLC3 may be eligible to be a QSUB/QSSS (Qualified Subchapter S Subsidiary), however, you’ll want to check with the IRS and/or an accountant. Typically, a QSUB is owned by one S-Corp. And the Parent S-Corp makes the election for its subsidiary to be a QSUB via Form 8869. The part I’m not sure about is whether or not two S-Corps can own another S-Corp. Feel free to share any findings if you’d like. Hope that helps and thanks for your understanding.

  6. Hi Matt, thank you so much for the detailed article. You made things look a lot clearer!
    I created an LLC last year and I was about to file form 2553 until your article.

    My LLC (I’m the sole owner) is not very profitable yet so I’ll be re-investing the benefits in it rather than paying myself a salary.
    Is it a good idea to switch to an S-corp? Since I won’t be paying myself a salary, will the administrative paperwork still be existent? (payroll, books, etc). Since my revenue is quite limited at the time, I’m trying to save time and money on complex filings and administrative matters.

    thank you so much for your help

    • You’re very welcome Sophia :) S-Corp taxation is definitely a lot more complex and has associated costs. We don’t recommend it unless the business is established and revenue is predicable and net income per Member is about $60-$80k. Also, you’ll need to take a salary as an employee-owner. Also (we’ll soon be updating the page about this), because of the IRS’s “60-month rule”, for many people who elect for their LLC to be taxed as an S-Corp, you can’t change the status for 5 years. You’re stuck with it. The exception is if the original S-Corp election was made at the time the LLC was formed. Hope that helps.

  7. Hi Matt,
    I have a single member LLC that is now filing as a S-Corp. My question is regarding
    health insurance paid thru the LLC. Do we have to record the heath insurance in
    Wages like you would with a S-Corp more than 2% owner?

    • Hi Mike, yes, as 2%+ S-Corp owner, you should record the total health insurance premiums paid by the LLC for you on your W-2. If you have a payroll company in place, they should be able to add this to your W-2 before submitting the form. If not, as of the 2020 tax year, the total annual premium paid goes in box 14 of the W-2 and can be labeled as “S-Corp health insurance” or “S-Corp medical”. Hope that helps.

  8. Greetings, I have a question for which I cannot get a straight answer :-(

    Is this statement TRUE or FALSE?

    If you’re a single member LLC, you can use Form 8832 to be taxed as a C-corp. And, if you want to be taxed as an S-corp and you’re filing Form 2553, you DO NOT need to file Form 8832 any more. I keep hearing that even with 2553, IRS does NOT recognize the LLC and one must file 8832 in order to be recognized by the IRS.

    Would you please help?

    • Hi Mo, true. An LLC electing to be taxed as an S-Corporation doesn’t need to file Form 8832; only Form 2553. This is from 26 CFR 301.7701-3(c)(1)(v)(C). In short, an LLC that files Form 2553 is treated like it first filed Form 8832 (to be taxed as a C-Corporation) and then immediately files Form 2553 (to be taxed as an S-Corporation). And also true: if you want your LLC to be taxed as a C-Corp, then you would just file Form 8832. Hope that helps :)

  9. Hi Matt, very detailed article, thank you!

    Question: I’ve got an LLC that’s been filing an 1120S as an S-Corp since 2013. Our banker asked to see a copy of the “S-Corp Verification Letter”, and we don’t have one on file. Neither does our previous accountant that did the initial 1120S returns. He says he wouldn’t have filed an 1120S w/o verification from the IRS that they accepted the election, but I’m not so sure he’s correct.

    Is that possible that we’ve been filing an 1120S for 8 years without ever getting approval from the IRS? And if so, what’s the worst that can happen?

    It’s quite possible that I did receive this verification letter and didn’t properly file it or scan it. I can’t remember.

    (I’ve been trying to call the IRS for several days with no luck)



    • Hi Jeff, you’re very welcome. Oh wow, that would be crazy lol. If you can’t find the CP261 Notice, we recommend calling the IRS at 7am or 8am:

      1. Call the IRS at 1-800-829-4933 (the “business and specialty tax line”).
      2. Press option 1 for English.
      3. Press option 1 for Employer Identification Numbers.
      4. Press option 3 for “If you already have an EIN, but you can’t remember it, etc.”
      5. Tell the IRS agent that you have an LLC that is taxed as an S-Corporation and that you need an S-Corporation Verification Letter (385C)
      6. The IRS agent will ask a few security questions to confirm you own your LLC.
      7. Tell the IRS agent whether you’d like to receive the 385C Letter by mail or fax.

      Hope that helps!

  10. Good evening Matt how are you?

    We started out with an LLC and went S Corp status after making enough income.

    We’re now about to open a corporation and mine as well elect for it as S also since we’re not publicly traded and it will benefit us all the most as S.

    Our question is in your experience and talking with other knowledgeable scholars, which one is better to have “sit on top” long term until we get an estate or trust fund way down the line for our grandkids?

    Do you see having the S Corp elected LLC at the “top of the house” as the parent company better and more beneficial? Or do you see having the S Corp elected Corporation at the “top of the house” as the parent company better and more beneficial?

    We’ll be using Form 8869 and grabbing two more partners pretty soon. (Grandson and Daughter). We also plan on acquiring small businesses and growing over time, getting more partners if need be too, and expanding into different sectors if that changes which is more beneficial at the top of the house.

    We currently have a music store, sell merchandise online like eBay and Amazon, and the grandson will be bringing some internet spice and possibly music recorders. The daughter will be bringing the life or art and the work behind that, looking into acquiring some theatrics of sorts down the line too.

    Sorry for so much detail and hope you can shed some light on this old man.

    • Hi Terrance, I’m doing well, thank you :) It’s really challenging to say which is best, especially in a scenario like this (or in a vacuum). There are numerous things to take into consideration. Our best recommendation is to speak to an estate planning attorney (who ideally also practices business law and asset protection… you might want to speak to a few attorneys). Reason why is a certain entity at the top may or may not be more beneficial for estate planning purposes (assuming some LLC/Corporation ownership was transferred to a trust). Also to keep in mind, an Irrevocable Trust cannot be an S-Corp Shareholder unless it qualifies as a QSST (Qualified Subchapter S Trust). In order to become a QSST, the Irrevocable Trust has to be setup in a particular fashion and it has restrictions (for example, only one income beneficiary and annual distributions must be made to said income beneficiary). That’s just one thing to consider. However, there’s far more. Really wish we could get into it with you, but there’s so may ways to structure things. Sounds like you have some solid businesses though, so best wishes!

  11. You made my life so much easier! Thank you so much, LLC University team. I’ll be thanking you for the rest of my life!!

    • Hi Sarang, you are very welcome! SO happy to hear that!! :-)

  12. Great article, thank you!!

    We have a multi-member LLC, previously taxed as a partnership, and would like to change the election to S Corp. Is there any need to file a Form 8832, or do we only file Form 2553 to make the change?


    • Hey Jason! Thank you! Nope. There is no need to file Form 8832 and Form 2553 to have your Multi-Member LLC (currently taxed as a Partnership) be taxed as an S-Corporation. As per 26 CFR 301.7701-3, filing a timely Form 2553 is as if the entity filed Form 8832 and then immediately filed a Form 2553. So again, no need to file Form 8832. You just need to file Form 2553 to have your LLC taxed as an S-Corp. Hope that helps :)

  13. I’m a physician starting to practice as part of a group in Wyoming and plan to establish an LLC.

    When considering whether to set u an S-Corp to benefit from the lower self-employment tax, I remember reading somewhere that I f you are in a service profession, such as health care, you cannot benefit from the ‘pass through’ self-employment tax (Social Security and Medicare taxes). However, I have also read of some new limits to be able to benefit from the tax saving…

    Can you offer any wisdom on this?

  14. What is the difference between an S-corp versus LLC taxed as an S Corp? Is there still the same level of administrative requirements (filing reports, maintaining records) as there is with a S Corp?

    • Hi Rita, please look towards the top of this page and search the word “forming”. You’ll see why S-Corporations and their semantics can be quite confusing. Just saying “S-Corporation” is actually an ambiguous term because it only reflects how an entity is treated by the IRS. It doesn’t describe the underlying state-level entity. Meaning, an S-Corporation is either a Corporation (formed in some state) that elects to be taxed as an S-Corporation by the IRS or an LLC (formed in some state) that elects to be taxed as an S-Corporation by the IRS. It is not possible to form an S-Corporation in any state (it doesn’t exist). An S-Corporation is simply a tax election that “sits on top of” either a Corporation or LLC. Having said that, if you find an article that doesn’t mention the underlying entity, it can be assumed the underlying entity is a Corporation. The state-level administrative requirements depend on whether the entity is a Corporation or an LLC. Hope that helps!

  15. Matt,
    I agree with reader comments, your comments are the most helpful I have found. I am leaning toward the LLC taxed as an s-corp and still have questions about the ownership situation of this form. Do the LLC rules apply in that partners are the owners and all you can give w-2 employees is a profit-sharing interest, not equity ownership. (probably not that simple) If you have a piece on this topic please direct me to it. I will look through your material. Thank you

    • Hi John, thanks so much! We don’t have a specific article on what you’re asking, however, you can add Members to your LLC at any time. If your LLC will be taxed as an S-Corporation, then you need to make sure they qualify as S-Corporation shareholders. Having said that, adding an LLC Member isn’t always a straightforward process, as it requires multiple steps, and we recommend hiring a tax attorney familiar with the process. If you own 100% of the LLC, then you need to transfer/sell a portion of your ownership (called LLC Membership interest) to the new person(s). This is usually done via an Assignment of LLC Membership Interest form. We don’t offer this form and we don’t recommend using a template. In more details, you need to transfer some of your LLC Membership interest to them, amend the Operating Agreement, issue K-1s to all LLC Members, and have your accountant update the IRS, keep track of stock basis, keep track of capital accounts, and keep track of balance sheet accounts. We recommend speaking to a tax attorney to determine the best entity and its tax election to accomplish what you’re looking for. And you may also want to looking into an Employee Stock Ownership Plan (ESOP). Hope that helps!

  16. I am starting an E-commerce company, are there any advantages to setting up an LLC in Delaware or Nevada as opposed to a state like NC? I will be the only employee and operating my home base in NC and not Delaware. What are the tax and legal implications related to setting up in one of those 2 states, is it worth it?

  17. Hi Matt,

    I am filing form 1120-S and State form CT-3-S for an LLC that is being taxed as an S-Corp. We are a multi-member LLC and still receive regular capital contributions from our owners/shareholders. When filing previous years taxes for the company we were an LLC partnership and the capital contributions from the partners was documented at the State Level on form IT-204-IP. Is there a spot on the 1120-S or CT-3-S forms where these contributions need to be identified? Any guidance would be much appreciated.

    Thank you.


    • Hi Noah, we’re unable to get into these types of specifics. It’s also a bit outside our wheelhouse. This is best addressed with a tax professional in Connecticut. We deal with LLCs in every state, and we don’t focus our materials on every single state tax form for all the different types of tax filings there are (it’s an enormous amount of forms). Thank you for your understanding.

  18. Matt, I have been reading online for days and your article is by far the best article.

    Regarding adding myself to the payroll, I have a couple of questions:
    (FYI, I have a single member LLC which was incorporated in April 2016)

    1- When should I be added to the payroll? 1)Right after filing. 2)After getting approval from the IRS. 3)The date that I put in Box E of the form 2553.

    2- If I send out the form in March 2019 and I have put 1/1/2019 in box E, should I pay myself salary for Jan and Feb or I can skip those months?


    • Hi Hooman, thank you very much! It’s best to discuss this with your tax professional as there are a few ways to go about. Meaning, you can make the S-Corp election effective 1/1/2019, but have your first “hire date” be 12/1/2019 (for example). So you would only do payroll in Q4 for the entire year. You can also start taking payroll right after the election is granted. The pros and cons will be specific to your situation though, so there isn’t a set way you “have to” do it. Hope that helps.

  19. Matt…..After spending hours getting advice from an accountant, a banker, and an attorney, it wasn’t until I found your website that I now understand everything I need to know about LLCs. Your information is fantastic. Thank You.

    I’m going to form the (single member) LLC for a new consulting business that will begin in 2 weeks. I am the sole owner. I’m still struggling to determine if I should elect the S Corp designation for tax purposes. I have a 1 year client contract in the amount of $130K to cover services and expenses. Business expenses could be $5 – 10K.

    2 questions:
    1) I read the advantages and disadvantages of S Corps……..but can you point me to the advantages and disadvantages of NOT becoming an S Corp for tax purposes if I am a single member LLC? I’m leaning toward keeping it simple to begin with by not choosing the S Corp election.

    2) If I want to receive a paycheck (from a payroll service, for example), is my only option to choose the S Corp election?

    • Hey David, you’re very welcome. Thank you for the kind words. From my personal experience, I’d say the disadvantage of not electing S-Corp taxation for an LLC would be if your net income is $150k to $200k, or more. In that scenario, there are certainly self-employment tax savings to be had. The advantage of your LLC not electing S-Corp would be the elimination of stress and headaches lol. There’s just a lot that goes into it all. For example, getting a bookkeeper in place, managing books, reconciling business bank statements, making sure your accountant is on board (may require numerous phone calls/emails), figuring out withholding, filing Form 2553 with the IRS, registering your LLC properly with your state Department of Revenue (or equivalent agency), signing up for payroll, configuring your payroll account settings (can be a little overwhelming), and then running payroll monthly or quarterly. A lot of people do prefer to keep it simple to start, and then go from there. You get take money from your LLC and “pay” yourself whenever you want. This is just an owner’s draw. You can’t take a “paycheck” though. A paycheck implies that you are a W-2 employee receiving a wage. In a Single-Member LLC taxed in its default status, the IRS deems you self-employed. Therefore, you cannot be an employee. You’re still “getting paid”… you’re just not running a paycheck through a payroll service. All your taxes would be computed and paid after the close of the tax year. Hope that helps.

      • Thanks, Matt. Three followup questions……1) If I took a “draw” from the LLC (that has NOT chosen the S Corp election), am I required to file quarterly estimated tax payments? Your response stated that “all your taxes would be computed and paid after the close of the tax year.” 2) For Social Security and Medicare taxes, will I be responsible for both the Employer and Employee portions? (15.3%) 3) Does the annual Social Security cap (132,900) still apply to me?

        • Hi David, you’ll want to speak with an accountant to double-check on all this. We have someone do our taxes, so we don’t know all the nitty gritty. I believe you’ll have to file quarterly. Yes, you’ll be responsible for the 15.3%. I believe the Social Security cap will apply. Hope that helps.

  20. Hi Matt,
    This one of the best articles I have read about this subject!!!
    Thank you so much for your help.

  21. Hello Matt:
    Thank you very much for your articles and it is very helpful. I have been read online to get a clear answer to elect S cooperation, your article is the best one. I have several questions like to ask:

    1. I currently have a single member LLC and taxed as sole proprietorship. I’d like to know does this LLC has personal liability protection to its owner Or I have to become a S cooperation then acquire the liability protection?

    2. I consult an account regarding to elect S cooperation, and I was told I need to form a S cooperation first by a lawyer then file 2553 form, This seems not right based on my reading for your article. Can you confirm this?

    3. Can I file the 2553 form myself or I need to find an account to do this for me?

    4. In your article “ partnership” is not allowed to be owners. Although my company now is a single member LLC, but I am considering to change to partnership. Does this mean once change to partnership we can not elect S cooperation any more?

    5. Distribution is not subject to self- employment tax. I was wondering any other tax will be subjected to distribution?

    Thank you very much

    • Hi Anne, thank you! Glad to hear that. Just a note, it’s an S-Corporation, not “S Cooperation”.

      1. The S-Corp election is a federal tax election. It has nothing to do with state law and personal liability protection. Meaning, the inherent personal liability protection is the same for an LLC taxed in its default status (an LLC taxed as a Sole Proprietorship or an LLC taxed as a Partnership) or an LLC taxed as an S-Corporation.

      2. This information is incorrect. You should speak with another accountant. You can’t “form” an S-Corp. It’s not a state entity. It’s a federal tax election that “sits on top of” state entity, such as an LLC or a Corporation. What this accountant was likely talking about was forming a Corporation in your state and then filing 2553 to elect S-Corp taxation. But that wouldn’t make sense if you’ve already, or plan to, form an LLC. Again, speak with a few other accountants.

      3. Either one. You’re not forced. You can file yourself or an accountant can file for you.

      4. Careful. A Partnership (General Partnership) and a Multi-Member LLC taxed as a Partnership are completely different things. A Multi-Member LLC can elect to be taxed as an S-Corp.

      5. This is a fairly complex answer. In general, S-Corp distributions aren’t taxed, but that depends on your basis each year. Once you find a good accountant they’ll be tracking your basis each year. Basis is the cost or investment in an asset.

      In S-Corp terms, that’s the cost to acquire the S-Corp stock. As per Section 301.7701-3(g)(1), when an LLC elects S-Corp treatment, the IRS treats this as if the LLC owner(s) contributes the LLC’s assets and liabilities to the S-Corp in exchange for stock in the S-Corp. Your accountant should be able to determine your basis once you “convert”.

      The S-Corp cost basis will change each year. In simple terms, It’ll be reduced by business losses and distributions and it’ll be increased by business income and contributions. Additional items that will affect an S-Corp owner’s basis are: tax-exempt interest income, other tax-exempt income, nondeductible expenses, and repayment of loans. There are more details and exceptions that apply. Having said that, I wouldn’t overthink #5. It’s a complex and an accountant can take care of it. However, distributions are either not taxed or they are taxed at a reduced rate compared to your salary.

      Hope that helps!

  22. I am the owner of a single-member LLC which was formed mid of last year.

    Is there any “Employer” tax forms that I need to fill out? As far as I am aware, I just needed to do my own taxes like a sole-proprietor since I am not employing anyone (other than me working on this LLC as an owner).

    • Hi Marie, since you are on the LLC taxed as S-Corp page, did you make the S-Corp election for your LLC? Or will your LLC remain taxed in its default status as a Sole Proprietorship? If taxed as a Sole Proprietorship, you’ll report the LLC’s income, loss, credit, and deductions as a part of your 1040 personal tax return, usually on a Schedule C. However, different forms or schedules may be needed depending on your situation. It’s best practice to work with an accountant to make sure everything is filed correctly. Not just federally, but also state and local, if applicable. Hope that helps :)

  23. Hey Matt,

    This has been really helpful! My question is, If I file the 2553, do I need to file anything else with the state if I am already an LLC?

    Thank you!

    • Hi Jonathan, great to hear! It depends on the state. In some states, there is an additional filing. We don’t have the research on all states at this time, so it’s best to reach out to your state’s Department of Revenue (or equivalent agency) and/or an accountant to check. Hope that helps and thank you for your understanding.

  24. Hi Matt, you have been such a blessing!
    In the overwhelming google-world, your website has been the best tool as I start this journey. I have a question regarding S-corp. I am starting a Franchise in Florida, I would like to start as an LLC and move to S-corp in year 2 or 3 depending on income (the first year will be mostly losses because of investment). The accountant I asked, said that I have to file for S-corp since the beginning (my first tax filing) or I will have to wait 5 years until I can switch again. I do not find this information here or anywhere else… are you familiar with this rule? I understood in the instructions above that I could switch at any time correct? I feel like being an S-corp might be more expensive than helpful at the beginning… any thoughts? Also, can you explain what a form 720? EIN form asks if I will use it and I do not know :S it also asks if I will provide W2, I imagine so, I will have employees but mostly part-time, I will be the only full time at the beginning. Thank you so much! you are awesome

    • Hey Ana, thank you so much! The information you were given is incorrect. The 5 year waiting period has to do with S-Corp revocation, then re-election. Not straight up S-Corp election. Meaning, if your LLC elects to be taxed as an S-Corp and then you revoke your S-Corp election, you then can’t re-elect S-Corp status for 5 years. We’ve written about that here: LLC revoking S-Corp election (search “5-year”). And if you want the real nitty-gritty, you can find that in Title 26 of the Internal Revenue Code. Check out section 1362 (see “g”). So your initial plan is correct, and it’s what most people do. You wait until your LLC has enough net income to justify the S-Corp election. It’s a lot of work setting up payroll, getting bookkeeping in place, etc. So yes, you can elect the LLC being taxed as an S-Corp whenever you want. Hope that helps!

      Form 720 is for excise tax. You can check with an accountant. You likely don’t need to worry about it. Some examples of items with excise tax are gasoline, indoor tanning, coal products, airline tickets, cigarettes, and alcohol.

      And careful with the use of the verb “employ”. I don’t think this is what you’re intending, but when you say employ, it means a W-2 employee. This means your LLC will setup payroll, pay employment taxes, withhold taxes for employees, maybe provide benefits, etc. I’m not sure if you meant that or you’re looking to hire 1099 independent contractors.

  25. I keep referring back to your excellent article. Thanks again.

    Quick question: I currently have single member LLC taxed as a sole proprietor. To be taxed as an S-Corp, do I first need to file Form 8832 and then afterwards file 2553? Or do I only need to file the 2553?

    Some accountants say that you need to file both but other accountants say no, just file the 2553.

    • You’re very welcome Alec! That’s great to hear. Just Form 2553. No need to send 8832. That was the norm a while back (which is why you’re getting conflicting information from accountants). But hey, sending 8832 + 2553 will work; it’s just totally unnecessary. And if you want the geeky answer, check out 26 CFR 301.7701-3. It’s in section (c)(1)(v)(C). Simplified: if your LLC is eligible to make the S-Corp election, and it’s made timely by filing 2553, it’s as if you’ve also filed 8832 to be first taxed as a corporation (and then immediately thereafter taxed as an S-Corp). Simplified further: the 2553 is like the 8832 + 2253 wrapped into one ;) Hope that’s helpful!

      • Super thanks for your quick and clear answer! Truly appreciate it.

        I do have another question about the business address. I’m hoping you might be able to share your insight.

        When completing the Form 2553, Part I and Part D ask for the business address and if the entity had changed address after the EIN was established. In my case, it’s kind of yes and no.

        I formed the LLC in 2004 in the State of Washington, as a Washington LLC, where I still have an address at a UPS Store. However, the business has since moved to a new address in California, where I now run the business. Both addresses can receive mail (with the WA address forwarding to the CA address). When I first got the EIN for the LLC in 2004, I used the WA address. I have not filed a form 8822-B with the IRS to change that address. However, the State of Washington has officially registered and recognizes my new address in CA.

        So, the question(s) are:

        1. In Part I of the 2553, should I write the current address in CA and then mark in Part D that my address had changed since applying for the EIN?

        2. Or should write in the address in WA and mark no change?

        • Hi Alec, the IRS doesn’t really care. They just treat the address as a mailing address. It’s a good idea to check off the address box in D as well as send in 8822-B (see change LLC address with IRS) if you’re updating the address. It’s a duplicate kind of task, but it doesn’t hurt. We’ve seen certain updates not take effect and the IRS can send mail to old addresses (which still constitute a legal notification). Did you file a foreign LLC registration in California or did you domesticate to California? If not, you’ll want to look into that since you’re transacting business there. Just changing your LLC’s address from one state to another is not “moving” an LLC.

  26. Thank You, Thank You!! You made understanding S-Corp very simple!

    My company was formed in 2017, but didn’t began making profits until 2018(set up payroll, all quarterly taxes where completed through the payroll company, pay myself a salary & hire W-2 employees).

    I recently realized I been treating my company like an S-Corp and this status is better for me. I’m submitting a 2553 form for 2019, I want to also elect the S-Corp status for 2018.

    My Question: Am I filing 1 2553 form starting 2018 or do I need to file 2, forms one for 2018 and one for 2019?

    • Awesome! Happy to hear that :) It would just be one Form 2553. You’d be making a late election though. Might be a good idea to speak to an accountant so that it gets approved. Hope that helps.

  27. Hi Matt,
    I have to say you have delivered the most informative and easy to understand explanations on EVERY topic I have researched! Thank you so very, very much! As soon as some money starts rolling in I WILL be donating to your benefit company as a thank you and so you can keep up the awesome work!!
    I truly appreciate your articles and knowledge, greatly appreciate also your simple to understand and non-contradictory clarifications on each subject!!
    1 question if you will, if election to be treated as an S Corp from a partnership has been accepted and if requesting to do business in a separate state other than the domestic state, would we request this as a foreign LLC or foreign S Corp?
    Do you offer registered agent services for this? If not is there one of the millions that you prefer?

    Thank You again!
    Merry Christmas


    • Angela! Thank you for the lovely comment. It means a lot :) What state did you first form your LLC in? The S-Corp is a federal election and is attached to your LLC’s EIN. Even if your LLC registers to do business as a Foreign LLC in a new state, the LLC is still one entity (it’s 1 LLC with authorization to do business in another state), so there’s no such thing as a “foreign S-Corp”. Is that helpful?

  28. Excellent Article!
    Dumb question.
    In the past our LLC submitted Form 1065, and the NC equivalent, Form D-403 to NC.
    Once our Form 2553 is accepted, the LLC will submit Form 1120S, and the NC equivalent, Form CD-401S to NC.
    Will NC question this? In other words, do they care which NC form you submit for the entity as long as you’re reporting it’s income?
    Thank you, and I hope I’ve made myself clear.
    Happy Holidays!

  29. Hi Matt,

    This has been the best article I have read since researching about all these. The LLC/S-Corp concept has been very confusing but you made it crystal clear what they are exactly. Thanks so much!

    Now my question is, which is better, S-Corp or Qualified Joint Venture? My husband and I are forming an LLC, and thinking which of the 2 we should consider for tax purposes.

    Thanks in advance!

    • Hey Mary Rose, you’re very welcome! And thank you :) You’ll want to discuss the details with a few accountants, however, the S-Corp election – depending on the LLC’s net income – can lead to a lot of tax savings (self-employment tax savings), while the Qualified Joint Venture election more so reduces the paperwork that needs to be filed (a Schedule C as opposed to a 1065 Partnership return + K-1s) and doesn’t nearly save as much (if anything). And as net income grows, the LLC/S-Corp will save you more and more. Hope that helps!

  30. Congratulations!!! The best explanation on how to work with an S-Corp!!!!
    Here goes my question: an s-corp with 2 shareholders: how can they change to only 1 shareholder? What needs to be sent to IRS?? Was verifying form 8832, but there is no where that I can state that one of the shareholders will be out of the S-corp. As for the state, I just need to amend on their website. Again, thank you so much for all the information!!!

    • Hey Carmen, thank you so much!! That’s very much appreciated :) Form 8832 would be for a change in tax classification, so don’t submit that.

      Changing ownership in an LLC/S-Corporation happens in the same way that changing ownership in a “regular LLC” happens. Meaning, the ownership change happens at the state level and then the IRS is updated via the S-Corporation’s Form 1120S and Schedule K-1s.

      You’ll only need to file an Amendment with the Secretary of State if the Member is listed. You may want to review the following with a tax attorney and/or the IRS, but here is an overview:

      – Review Operating Agreement for any specific rules regarding sale of LLC membership interests.

      – Have the Members sign a Resolution agreeing to the sale/transfer of LLC membership interest from Member A to Member B.

      – Have Member A sell/transfer their membership interest to Member B via an Assignment of Membership Interest Agreement.

      – Amend Operating Agreement showing the LLC now has 1 Member.

      – Amend state filing (if Members are listed).

      The LLC’s federal tax election with the IRS will still remain an S-Corp. How the IRS gets updated about the shareholders is via the Schedule K-1s, more specifically the final Schedule K-1 that’ll be issued to the exiting Member/Shareholder.

      Not a major deal, but to eliminate the need of prorating, it may be worth considering to have Member A sell their membership interests to Member B on 12/31/2018. So the S-Corp’s 1120S will issue a K-1 to both Members, but Member B’s is a final K-1. Then for the 2019 tax year, there is just one Member/Shareholder that’ll get a K-1 showing 100% of the profits/losses allocated, which now reflects their 100% ownership interest in the LLC.

      There may be a different way to update the state Department of Revenue (or relevant state agency) as well as any local tax bodies, but that’s something you’d have to do a bit of research and make some phone calls on. Hope that helps!

  31. You clarified a lot for me, thank you. I’ve been wanting to start an LLC for my online business and have read the benefits of being taxed as an S-Corp but now I think I will stick to with LLC taxation. Seems simpler and the cost savings of an S-Corp don’t really seem to justify all the extra hassle for a single member LLC, especially since my net income is not near the $75,000-$100,000 mark yet.

    • Hi Terry, sounds like a solid plan. I agree. Stick with default taxation and focus on growing and sustaining your business. Get that net income towards 6 figures and then revisit having your LLC taxed as an S-Corporation. You’ll need to register with your state’s Department of Revenue (or equivalent), then setup payroll, and we recommend working with an accountant and bookkeeper. You’ll need to keep and reconcile a set of books. A bookkeeper can help with that since a balance sheet is required to be filed with your 1120S. Said another way, it’s a good amount of work to set up the S-Corp election, setup payroll, keep reconciled books, and manage payroll. Make sure it’s worth the effort ;) Hope that helps!

  32. Matt,

    Thanks again for another highly informative post. I’m curious to know your thoughts on the following idea for the LLC I’m looking to form. My partner and I will be forming an LLC strictly for investing in online businesses. The “work” he or I would be doing would be de-minimus (4-10 hours for the whole year) because 99.9% of the work will be managed by a 3rd party we will pay. Logically we would find a way to set this up as passive LLC owners but that would require us to find a 3rd party LLC manager making us 100% passive but I’m not sure we want to go down that route due to control issues. However in order to get as close to fully passive (which accurately reflects our status) we were thinking the following:

    1) Set up the LLC as manager controlled where one of us is the manager and the other is a passive investor.
    2) Structure the LLC tax treatment as S-corp
    3) Pay the manager a “reasonable salary” for his work which at an hourly rate of $100 or even $200 / hour would only amount to $1000 – $2000 / year which seems reasonable given the amount of work actually done. I realize this might raise red flags but it would be an accurate representation of work done. Not sure if that might still be a problem.
    4) The remaining income for the manager would be earned as passive income and the other passive member would receive all his income as passive income as well.
    5) I heard somewhere there might even be a way to avoid the payroll service provider costs by setting a fixed payment amount in lieu of a salary up front. Not sure if you know anything about that but would seem to apply nicely in this case.

    Any thoughts or color on our line of thinking would be greatly appreciated.


    • Hi again Andres! One thing to consider is that you could still hire someone as an independent contractor to “manage” your operations, but you don’t have to make them an “LLC Manager”. If needed (and it’ll still be passive without giving up control – meaning, you keep the LLC member-managed by you and your partner), you can tell the 3rd party that they are the company’s “manager”, but it’s just a formality, not a legality. You’ll just pay them (flat rate, hourly, etc. – whatever you want) and have a contract between them and your LLC spelling out the details of the relationship. Regardless of how the “manager” is put into place, if your LLC’s net income justifies the LLC being taxed as an S-Corp, then it’s a good route to consider. Regarding #5, I’m not sure about that. The LLC being taxed as an S-Corp will need to pay you and your partner a reasonable salary and that’ll have to get processed through payroll so that payroll taxes are taken care of. What you heard re: #5 may only apply to an LLC being taxed as a Partnership, but not an LLC being taxed as an S-Corp (correct me if I’m wrong though). Hope that helps. Feel free to keep me posted on how things evolve. I know you had questions about the state where you were settings things up. I admire your details. I’m the same way. Thinking through everything ahead of time, developing a strong strategy, and then executing. Cheers!

  33. This is such a great piece of information, I set up a LLC for a client and sent a 2553 out for a S election and received the s election approval letter in January of 2018, fast forward, Now im missing the Ca corp No. to file the 100s on the California side. Did i miss a step?

    • Hey Manual, thank you! We’re not sure on this as we don’t go that deep into taxes. Since you can list the LLC’s Secretary of State File Number and its EIN, I’m wondering if the California Corporation Number on the S-Corp’s 100S is N/A and maybe it can be left. Have no idea though. Please call the Franchise Tax Board on this. I recommend calling shortly after they open. If you’d like, feel free to share your findings. Thanks!

  34. I just formed my LLC in Sept 2018, I was thinking on requesting to be treated as S-Corp for tax purposes with the 2553 form. This is a one member LLC but as I am setting up/starting business, I do not know what my profit or salary would be yet, if I do not pay myself salary yet would that be an issue for my LLC? As per S-Corp requirements member salary has to be in line with profession but I do not think my profit would be even close to that number yet, is the S-corp a good move? or should I wait until revenue grows in order to set a salary base for myself? what are your recommendations?

    • Hi Eneida, it’s best to wait until you’ve established sufficient net income before electing to have your LLC taxed as an S-Corp. Do you have an accountant you can speak with? If so, see how the first 6 months go and take a look at your revenue and expenses. Then speak with your accountant about the timing of when to make the S-Corp election. Hope that helps!

  35. Thanks so much for this VERY CLEAR explanation regarding LLC (including single member LLC) opting to be taxed as S-Corp. I have been trying to figure out which route to go to and your article is the most helpful one I have encountered so far!

    • Hi Marie, you’re very welcome! Glad to hear that we could help. Thank you for the kind words :)

  36. If I elect to have my LLC taxed as an S corp, do I then have to do my bookkeeping and reporting as if I were a corporation? Do I have to have annual meetings and such, or do I keep the relatively simple requirements of an LLC?

    • Hi CJ, no need to hold annual meetings (unless you want to). Even though the LLC is making an election to be taxed as an S-Corporation, it’s still an LLC, so you get the same simple requirements. Having said that, you’ll want to look over bookkeeping and reporting to make sure your taxes are in check. We recommend working with an accountant. Hope that helps.

  37. Does the LLC with the changed default tax classification use an Operating Agreement as with default LLCs or Corporate Bylaws like a corporation?

    Do S-Corporation Shares need to be issued? How does one go about issuing shares?

    • Hi Joseph, while the LLC is taxed like an S-Corp, it is still an LLC, so no shares are issued. The LLC can use a regular Operating Agreement. No Bylaws. However, if desired, additional sections can be added to the Operating Agreement that are specific to the S-Corp tax election (if the Members find it necessary to go into detail). Not required though. And usually, most Operating Agreement templates have a section which states how the LLC is taxed. Hope that helps.

  38. S Corp ownership – can an lic taxed as an s Corp be an owner of another lic taxed as an s Corp?

    • Hi Jeff, yes, an LLC taxed as an S-Corp can own another LLC taxed as an S-Corp. Said another way, an S-Corp can own an S-Corp. This is known as a Qualified Subchapter S Subsidiary, aka “Child S-Corp”, aka “QSUB” or “QSSS”. The Child S-Corp is treated as a division of the parent. In order to make this election, one must file IRS Form 8869. Hope that helps.

  39. Thank you so much for simplifying this subject. I completed the S-Corp process and my LLC is now being treated as a S-Corp effective 1/1/2018. It was definitely a process that I don’t want to do over. When I submitted Form 2553, the IRS stated they didn’t recognize the EIN attached to our LLC as valid, and assigned me a new EIN. Then they must’ve went ahead and processed the S-Corp with the new EIN they assigned to me. Before I was able to receive the approval letter stating that they went ahead and creating the S-Corp with the new EIN, I faxed over supporting documents to the IRS showing that my “original” EIN attached to my LLC is valid and I was current on all my annual filings with the Secretary of State. So I was very confused when I received 2 conflicting letters from the IRS. The first letter stated that they approved my request to be treated as a S-Corp with the new EIN they assigned me. The second letter I received stated that my “original” EIN assigned to my LLC is in fact valid and that I should use this EIN on all federal tax returns or related correspondence. I hope I haven’t lost you yet, because believe me I was lost and I still am. So to simplify, I now have 2 different EIN’s. The original EIN that is tied to my LLC and the new EIN that the IRS assigned to me that is attached to my S-Corp. Moving forward, do I just use my S-Corp EIN for all IRS documents and completely disregard my original EIN? I have several 1099 contractors that I use, when I send them their 1099’s at the end of the year do I use the original EIN that I’ve always used for them or the new EIN? Do I continue to file an annual report with the Secretary of State for LLC with the original EIN or the new EIN? If it is the new EIN, do I have to register that new EIN number with the SOS and have them replace my original EIN with the new EIN? Is it okay to have 2 EIN’s? Since we’ve been approved to be treated as an S-Corp for 2018 I have not done anything with it due to the fact that I am unsure of what EIN to use and nobody seems to know how to help. I REALLY hope you can help me! Thank you so much in advance.

    • Hi Jessica, subtle clarification: the EIN is attached to the LLC that is taxed as an S-Corp. The EIN isn’t attached to the S-Corp. Sounds like you have two of them (2 EINs attached to 1 LLC, which is taxed as an S-Corp). From what you’ve shared, sounds like the “original” EIN is good to go, since the IRS made a mistake, then later corrected it (but in the middle, issued a new EIN). I would call the IRS in the morning (800-829-4933) and confirm the situation. If they confirm the “original” EIN is good to go, and the S-Corp election is in effect, tell them you plan to cancel the “2nd” EIN and ask if that’s okay. If so, then you can cancel that EIN and you’ll be left with your original. Hope that helps! This is quite interesting and we haven’t seen this before. Feel free to post an update in a couple months once things get squared away. Thanks.

  40. Is there any issue with assets?
    Do the current depreciation schedules just carry forward or does the LLC “Sell” the assets to the Sub-s

    • Hi Neal, we don’t go this far into the tax specifics so please double-check on this, however, as per Section 301.7701-3(g)(1) (tax classification of business entities), when a disregarded entity LLC makes an election to be treated as an S-Corp, the IRS treats that action as though the LLC owner contributes all the LLC’s assets and liability to the S-Corp in exchange for stock of the S-Corp. Hope that helps.

  41. What is the difference between a LLC that elects to be taxed as an S corp versus a Corporation that elects to be taxed as an S corp? I am still confused on this. Could you please advise

    • Hi Vincent, at the federal taxation level, the tax entities are treated the same by the IRS, but at the state-level, it’s two completely different legal entities with different structures, rules, and formalities. We have more info here: LLC vs Corporation. Hope that helps.

  42. Great article very well written. I have a question….If a LLC is formed with 2 or more members/shareholders and then elects to be taxed as an S-Corp and also elects to be a QSUB ….Will the IRS be looking for Form 1120-S to be filed or will it be considered a disregarded entity and no tax filing requirement for this entity?

    • Thank you Iris. If your LLC makes a QSUB election (your LLC taxed as an S-Corp is owned by another S-Corp), then the subsidiary S-Corp’s income, loss, deductions, and credits will get “bundled up” into the parent S-Corp’s 1120S return. Hope that helps.

  43. Very well written and simple to follow article. Thank you for writing this article!

    • KK, you’re very welcome! Thanks for the nice comment :)

  44. Hi Matt,

    Thank you for this comprehensive article. I have a question. My wife and I are partners in our new business. Our LLC was formed on March 23, 2018, but we started working for a client around January 18. I am filing form 2553 today, April 23, 2018. Once the form is accepted by the IRS, will our LLC be considered as an S corp for tax purposed starting on January 1, 2018? Or will we have to file our taxes as a partnership first (until ~ March 23) and as an LLC taxed as an S corp for the rest of the year?

    Thank you for your help.


    • Hi JMC, you’re very welcome. Since the LLC did not exist until 3/23/2018, then yes, from 1/1/2018 to 3/23/2018, you should be filing your Partnership return (marked final) and from 3/23/2018 through the end of the year, you’ll be filing as an S-Corp. You asked your question like this: “Will our LLC be considered as an S corp for tax purposes starting on January 1, 2018”. Yes, it will, but since the LLC didn’t exist January 1, then that 1/1 date doesn’t apply. I’m fairly certain this is the case, but feel free to run it by an accountant if they think otherwise. Hope that helps.

  45. I’m a CPA and was looking for a good article to give to clients who would like to read more on converting their LLC’s into S-corporations. I have read several over the years and your article is by far the absolute best. Thank you for posting you have a beautiful talent and keep up the great work!

    • Neda! Thanks so much, what a lovely comment to receive! We spent a tremendous amount of time crafting this lesson, so it’s always great to hear how helpful it is :)

      • Is it acceptable to reprint some of your information to share with tax clients?

        • Hi Vicki, as long as the authorship information is not retracted, then yes, you’re more than welcome to. Thank you.

  46. Hello Matt,

    I need a little help please. I am needing to verify if I just created my business last year on 12/20/2017. I received the approval for S-corp status dated in the letter 2/21/2018 to be taxed on my SMLLC. Do i still need to file an 1120s form since the date from the IRS shows accounting period as of 12/20/2017 ending 12/31/2017 ? I received the letter in Feb but there was no time to conduct business so there was no revenue for that time frame. Also will i have to pay a penalty if there was no money made at all ? If i do have to file a 1120s with zero money made, am i filing it under my LLC using Turbo tax application or am i not even filing the LLC since i filed the S-Corp 1120s ? Would i file it just as a 1040? Im really confused and need to have this all done by this Friday 4/13/2018. Your help would be greatly appreciated. There has been 2 major illnesses in the family and i have been juggling everything by myself. Sorry for the sob story but my backs up against the wall Sir.

    Thank you so much for your time

    • Hey John, we’re unable to get into the details of how each person should complete their tax filings. You’ll need to work with an accountant in order to properly assess the situation and get the appropriate documents filed. Ask them about an extension to give you more time to get things organized. Thanks for understanding and we hope you get things sorted.

  47. For 2018, I filed 2553 to convert existing California LLC to S Corp for a single owner (shareholder). S Corp is going to pay salary to the single shareholder. For the purposes of registering for a payroll tax account with federal and state agencies, does the company register for payroll tax account as an LLC or an S Corp? The current EIN and California SOS is for the LLC, and the company was formed as an LLC, only taxed an S Corp. Can you please help clarify how this company should file for payroll tax purposes – as an LLC or as an S Corp?

    • Hi Tina, your LLC is taxed as an S-Corp with the IRS and that election is “attached” to your LLC’s EIN. So when you say “the current EIN and California SOS is for the LLC”, I’m not sure what that means because it doesn’t make sense. Let’s break it into two parts. First, “the current EIN is for the LLC”. Well, not exactly. The current EIN was for the LLC taxed in its default status (taxed as a Sole Proprietorship). After Form 2553 is processed by the IRS, your current EIN will then be for an LLC being taxed as an S-Corp. Second, “California SOS is for the LLC”. I’m not sure what that means. I imagine you mean your California SOS Entity Number is for the LLC. While yes, that is correct. Once you elect S-Corp taxation with the IRS, the California Franchise Tax honors that election and will allow your LLC to file taxes as an S-Corp in California. California LLCs taxed as S-Corps need to file Form 100S (“California S Corporation Franchise or Income Tax Return”). Hope that helps a bit :)

  48. Hi Matt,
    Great read, thanks!
    Quick question — if 2553 simply changes the way an LLC is handled from a tax standpoint (now as an S-Corp) then what goes on the 1120-S? The single member LLC (owner) is “not an officer of a corporation” but it seems as if the 1120-S demands their be an “officer” listed. Then was about wages paid from the company to the owner? Are these “officer” payments even those the owner is not technically an officer of a corp?
    Thanks in advance!

    • Hey Steve, thanks! Form 2553 creates the S-Corporation election. 1120S is the annual tax return for the corporation (the LLC). The owner of an LLC taxed as an S-Corp becomes a W-2 employee (in addition to the owner) and must take payroll. We first recommend speaking with an account to make sure S-Corp taxation is right for the LLC, then working with a payroll company (I like Gusto Payroll), then working with your accountant each year to have the 1120S (in addition to all other federal, state, and local returns) filed property. Hope that helps!

      • Thanks. I know this. What I mean is, does the W-2 income go on line 8 of Form 1120-S or on line 7 (as compensation of officers).
        Technically, the entity is still an LLC so the person is not an officer of a corporation (see what I mean)?

  49. So I currently have an LLC. If I want to keep it an LLC but be treated as an S Corp for tax purposes, is it already too late for that to be effective for 2018 taxes?

    • Hey Melissa, it’s past the “deadline”, but the deadline is pretty loose and the IRS usually grants “late relief” to LLCs electing S-Corporation status. Check out the section above titled “Late election of S-Corp status”. It talks just about this. I’d still mail off 2553 and see what they say!

  50. I have a specific question; I just filed 2553 to convert my existing 1 person LLC taxation status to an S corp on 03/15/18 (the deadline) and want the status to be for 2018, but it sounds like there is a chance the IRS does not accept it? I wont know for 60 days, but at that point I will have missed both quarterly filing requirements. What is the recommendation in this case? Hope it went through and file quarter 1 with salary info for myself and unemployment tax payments? Sounds like a mess if I get a denial letter and none of those things are valid.

    • by “both quarterly filing requirements” I mean state & federal

      • Hi Greg, it’s very likely your LLC’s S-Corporation Election will be granted, however, if it’s not, and you’ve already filed Q1, you can always file Form 941-X (“Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund”), and just get a credit or refund. Your state likely has a similar form for an overpayment. The IRS and state Departments of Revenue don’t just “steal” money if it’s overpaid. It usually just sits on the account as a credit. Hope that helps.

  51. Matt, thank you so much for this guide. I’ve read through all of it and it is VERY helpful. I’ve been obsessively reading about how to start an S corporation for the past few days and this article is definitely the most concise and easy to follow. I’m adding this to my favorites as it’s a great blueprint that I’m sure will I’ll need to come back to a few times as a refresher. I do have 3 questions regarding payroll, payroll related taxes, and quarterly income taxes if you don’t mind (and I really do appreciate it so much):

    #1. Form 941. The IRS says employers use this form to “Report income taxes, social security tax, or Medicare tax withheld from employee’s paychecks.” and “Pay the employer’s portion of social security or Medicare tax.”……. My question is, if I’m just reporting the tax withheld from the employee’s paycheck, and paying only the employer’s portion, when does that withheld amount actually get paid to the IRS, and through what form?

    #2. When a payroll service such as Gusto or Intuit says they do the tax form completion and filing for you, what all does that typically encompass? Does this mean I don’t have to do *any* payroll related filings myself, such as form 941?

    #3. And finally… income tax. I will be a 1 person company, so I am planning on withholding my federal, state, social security and medicare taxes from my salary. My 1st and 2nd questions asked about the 2 latter, but when do federal and state taxes get paid, and through what form? I’m guessing this has to be done quarterly, but since I won’t be doing that like I would with a sole proprietorship (since I will have a paycheck that the S corp already withheld taxes from), it makes it a little confusing.

    I’m trying to make a simple list of every single form I will need to file throughout the year for a very simple, typical, 1 person LLC taxed as an S corp in Oklahoma. So far, I have the initial 2553 for S corp taxation election, 941 for reporting withheld SS and medicare taxes + paying the employer portion (quarterly), 940 for unemployment taxes (annual, since I am only 1 employee), and 1120s and K1 for end-of-the-year federal income taxes. I feel like I’m making progress on knowing what to do on the federal level, but I haven’t even hardly begun to learn what to do on the state level.

    Thanks again

    • Hi Ryan, you’re very welcome! Thank you for your thoughtful and well-structured comment.

      1. I’m not sure on this as our accountant handles the details.
      2. Yes, it should mean that you don’t have to do any payroll related filings yourself. I’d email or call the potential payroll companies, but it usually entails the following:
      – Federal Forms 941 (quarterly) and 940 (annually)
      – Annual Federal W-3 and W-2(s)
      – State W-3 and W-2s (if applicable)
      – State Unemployment returns (quarterly)
      – State withholding (if applicable)
      3. Your federal and state taxes will likely be paid quarterly. Exactly what forms will depend on the details of your entire return. I recommend speaking with a few accountants for a more in-depth look.

      Apologies I couldn’t provide more black and white answers. Overall, you have a great grasp of the situation, but taxes vary widely from person to persona and from business to business. Thanks for your understanding.

  52. This is the best written article I could find on this subject. Thank you for much for making LLC un-complicated!

    Question: When trying to determine if it’s worth taxing my single member LLC as a S-Corp, is there a calculator or spreadsheet model you’d recommend?

    The calculators I find online simply compute the difference in tax between sole proprietor and s-corp tax. But what they don’t account for is the lost benefit of the SEP IRA tax deduction, the added cost of administering tax filings, etc, among other things. My goal is to determine at what business income level it’s really worth changing to S-Corp taxation.

    I’ve used calculators such as Assuming a business income of 200K and a salary of $120K, it says I’d save only $2.3K going with an S-Corp taxation, not taking into account standard deductions. If I get taxed as a sole proprietor, however, I could more to my SEP IRA — that is I could contribute 40K to my SEP IRA (20% x 200K) instead of $24K (20% x $120K), thus reducing my taxable income by $26K, which therefore reduces my tax by at least as much as I’d save If were to get taxed as an S-Corp. Am I missing something?

    I think it would be super helpful to many to find a spreadsheet or calculator that would help determine the true quantitative cost/benefit.

    Super thanks again.

    • Hi Alec, thank you for the great comment! We’ve worked hard to make things easy ;) We don’t have a spreadsheet model yet, but it’s a great suggestion. Thank you! Simple rule of thumb is once net income is 75k to 100k annually, LLC taxed as S-Corp usually makes sense, but in your case, regarding the SEP IRA contributions and other factors, best thing to do is call an accountant and dive a bit deeper. I know “call an accountant” isn’t usually the most actionable advice, but have something called the “knights of the roundtable” strategy where you can ask your question to a handful of people, get the proper answer(s), and then possible begin working with someone if/when needed. The details of that are included in the link from the prior sentence. I’m curious to hear what you come up with though, so feel free to keep me posted if you’d like. Hope that helps!

      • Thank you for your reply. Really appreciate it.

        I found an online calculator that accounts for SEP, HSA contribution, etc. I’m can’t sure how accurate or up-to-date it is but it’s helpful nonetheless.

        As I was reading up on pros and cons s-corp vs single-member LLC, some other considerations came to light:

        — S-Corp allows you to make HSA contributions (up to $7.9K for families), which are tax-exempt. I don’t believe a single member LLC can do that.

        — S-Corp also allows those 50+ or older to do catch up IRA contributions of $6K, which can be tax-deferred.

        –S-Corp, if combined with a Solo 401K, allows your business to contribute up to 25% of your wage to you solo 401K plan, while you individually can contribute up to $18.6K (plus $6K if you’re over 50). You can’t use a Solo 401K with a single-member LLC.

        So the total and maximum tax-advantaged contributions of HSA and solo 401K can be greater than what than what a single-member LLC with SEP IRA can do.

        The downside I learned about S-Corps is that in some states like mine, California, the state tax is much higher than that for a single-member LLC. It depends however on your profit margin (In California, single member LLCs pay a fee based on “revenue”, while s-corps are taxed on business “profit” (net income.)

        • Hey Alec! Thanks for this thoughtfully written followup! You’re absolutely correct. There are far more details that go into the taxation of an LLC taxed as an S-Corp. A big one is the larger amounts of tax-advantaged contributions one can make. We will consider expanding upon these in the article. Thanks so much for helping make this article even better!

  53. I formed an LLC last year and did the SCorp election admittedly rather blindly when someone told me I should. However, for me, it seems to have caused more harm than good in all the confusion it causes with taxes. (My husband has been attempting to do my counting and taxes to save the accounting fees since my LLC is just a part time business for me.) I read the article above and it all makes sense, but my income level is not sufficient to gain the benefit from the SCorp election. Is there a way to revoke it and go back to taxing as a sole proprietor in subsequent years?

    • Hi Becca, yes, you can revoke the LLC being taxed as an S-Corp. If you have a Single-member LLC you’ll be reverting to taxation as a Sole Proprietorship. If you have a Multi-member LLC, you’ll be reverting to taxation as a Partnership. An LLC revoking its S-Corp election is also known as a “Voluntary Revocation of S-Corporation Status” (which essentially “reverses” what Form 2553 did). There isn’t one specific form to send to the IRS to “Cancel an S-Corp election”, but instead you need to send the IRS 3 things:

      1.) Letter of Revocation of S-Corporation Election
      2.) Statement of Consent of LLC Members for S Election Revocation
      3.) IRS Form 8832

      You can find the instructions and download links to these forms here: LLC Revoking S-Corp Election with IRS. Hope that helps!

  54. Truly the most comprehensive, well written explanation I’ve found. And I’ve been looking for a long time!

    • Stephanie, thanks so much for your note! It’s comments like yours that make the “work” worth it. It’s the fuel we need to continue producing the most helpful and most comprehensive guides. It took a tremendous effort. So we very much appreciate your gratitude!

  55. This article literally answered most of my questions. Thank you so very much! the only other question I have is: “Do all of the rules above apply to a Florida LLC electing as an S-Corp?”


    • Hi Nina, that’s great to hear. You’re welcome! Do you have a specific question instead? That would be easier. Thanks.

  56. you should write text books; outstanding, complete and simple to understand. nicely done.

  57. This was so helpful. Thanks so very much for making this simple to understand! I personally appreciate the help. Thanks again!

    • You’re very welcome Sylenda :) Thank you for the nice comment!

      • In previous years I have used my business card for personal purchases, any way to fix this besides opening a brand new LLC And starting fresh? other thoughts?

        • You don’t have to open a new LLC to remedy this. Just stop using the business card for personal expenses and you’ll know that your 2019 records (and ongoing) will be accurate. Hope that helps.

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