LLC S-Corp Election

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Most LLCs start with pass-through tax treatment, but some LLCs can benefit from electing S-Corp tax treatment with the IRS.

What is S-Corp election for an LLC?

An LLC may elect with the IRS to be taxed a sole proprietorship, partnership, S-Corp, or C-Corp. S-Corp tax treatment results in profits and losses passing-through to the owners’ personal income taxes (like a sole proprietorship or partnership). S-Corp taxation also permits owner-employees who earn more than ~$75,000 per year to save on self-employment taxes. Every year the LLC files Form 1120S and distributes Form K-1 to each member. The members include the LLC profit or loss listed on Form K-1 when filing and paying their personal income taxes.

When is it beneficial for an LLC to elect S-Corp taxation?

S-Corp is beneficial for owner-employees who earn more than ~$75,000 per year. An S-Corp lets you split your profits into “shareholder wages” (subject to 15.3% Social Security, Medicare, and self-employment taxes) and “distributive share” (NOT subject to 15.3% Social Security, Medicare, and self-employment taxes). In contrast, an owner of an LLC with pass-through taxation pays 15.3% on the entire profits. Active owners in an S-Corp must pay themselves a reasonable salary, but realize a 15.3% savings on the rest of their retained profits.

Do you qualify for S-Corp tax treatment?

To qualify:

  1. Members may only be individuals, certain trusts, estates, and certain exempt organizations (such as a 501(c)(3) nonprofit). Shareholders may not be partnerships or corporations.
  2. Members must be US citizens or residents.
  3. The LLC may have no more than 100 members.
  4. The business profits and losses may only be allocated in proportion to each member’s interest in the business.
  5. All members must consent to the election.

How does an LLC elect S-Corp taxation?

File Form 2553 Election by a Small Business Corporation with the IRS to apply for recognition under IRC Subchapter S. After IRS approval, you may need to file additional paperwork with your state department of revenue for recognition of s-corp taxation.

More Information

Key Takeaways:

  1. Most LLCs benefit from pass-through taxation when starting out.
  2. S-Corp is beneficial for owner-employees who earn more than ~$75,000 per year.
  3. File Form 2553 with the IRS to elect S-Corp tax treatment.

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