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Kateryna Dzhevaga·IRS CAA · Authorized IRS e-file Provider·Federal practice (all 50 states)·EN · RU · UK
S-Corp election (Form 2553)

S-Corporation election — tax savings

We elect S-Corporation tax treatment for your LLC via Form 2553. $5–15K/year savings on self-employment tax for US persons with $80K+ income. I run payroll, prepare Form 1120-S.

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What is an S-Corp election and why it works

An S-Corporation is NOT a separate legal entity. It is a "tax regime" the IRS applies to your LLC or Corporation when you file Form 2553. Legally, your LLC stays an LLC — same contracts, EIN, banking, state annual reports. What changes is how the IRS calculates your taxes. The core benefit — self-employment tax (15.3%) savings: In a default LLC: all $150K of profit is subject to 15.3% SE tax = $22,950 in Social Security + Medicare, plus federal income tax 22–37%. In an LLC with S-Corp election: you split the profit into "reasonable salary" (e.g., $60K) and "distributions" ($90K). Only the salary is subject to FICA payroll tax (15.3%) = $9,180. Distributions are NOT subject to SE tax. Savings: $22,950 − $9,180 = $13,770/year. This is fully legal and standard — the IRS explicitly permits this structure in IRC §1402(a)(13). But there are conditions: 1. Salary must be "reasonable" — comparable to market wage for your work. If you're an IT consultant earning $200K and pay yourself $20K salary — IRS will reclassify and assess penalties. 2. Income must be sufficient (~$80K+) so savings cover additional costs (payroll service, Form 1120-S filing). 3. Owner must be a US person or resident — non-resident aliens (NRA) cannot own S-Corp. 4. No more than 100 shareholders (not an issue for small business). Typical use case: freelancer or consultant with $100–300K net income, US citizen or resident, doing business solo or with one partner. For them, S-Corp election is standard optimization.

Important for US non-residents

S-Corp election is NOT available to US non-residents (NRA). Per IRC §1361(b)(1)(C), an S-Corporation shareholder must be a US citizen or US resident alien. NRA ownership disqualifies the S-Corp election — the IRS will revoke it and assess back taxes plus penalties. If you're a non-resident owning a US LLC, your options for tax optimization are different: C-Corp election (21% corporate tax, can be advantageous in some treaty scenarios), or stay with default pass-through and apply treaty benefits on Form 1040-NR. For mixed ownership (US person + NRA partners) — S-Corp election is impossible. The whole entity must qualify.

When the S-Corp election makes sense

S-Corp election becomes worthwhile at ~$80,000/year net income for US persons. Below that — additional costs (payroll service $500–1,000/year + Form 1120-S filing $1,500–3,000/year) eat the savings. Rule of thumb: • Income < $80K — stay with regular LLC. SE tax ~$11K, compliance costs ~$300. Net S-Corp benefit ≈ 0 or negative. • Income $80–150K — S-Corp election saves $3–8K/year after all costs. Worth considering. • Income $150–300K — savings $8–15K/year. Clearly worthwhile. • Income $300K+ — savings $15–25K/year + extra benefits (solo 401k contributions, health insurance deductions, etc.). Other important factors: • Willingness to run payroll — auto-split of salary from distributions. Bi-weekly or monthly. Via Gusto, OnPay, ADP — cost $40–100/month. • Income stability — S-Corp suits steady income. Seasonal or unpredictable business makes payroll harder. • Sole owner vs partners — S-Corp election is easier for single-member LLC. For multi-member, requires coordinated salaries and profit distribution.

Savings example: freelancer with $150K income

Anna, an IT consultant from California, US citizen. Net income $150,000/year. Without S-Corp election (default LLC): • Self-employment tax: 15.3% × $150,000 × 92.35% (SE-adjusted) = $21,200 • Federal income tax (single, after SE adjustment + standard deduction) ≈ $24,000 • California tax ≈ $13,000 • Total tax: ~$58,200 (38.8% effective) With S-Corp election (salary $60K + distribution $90K): • FICA on salary: 15.3% × $60,000 = $9,180 (split: employee/employer) • Federal income tax (salary + distribution = $150K base, after deductions) ≈ $23,000 • California tax ≈ $13,000 • Payroll service (Gusto) $720/year • Form 1120-S prep ≈ $1,800/year • Total tax + costs: ~$47,700 (31.8% effective) Net savings: $58,200 − $47,700 = **$10,500/year**. Over 5 years = $52,500. The S-Corp election pays for itself in the first 3 months.

How an S-Corp election is done

5 steps from benefit analysis to your first Form 1120-S.

1

Benefit analysis (consultation)

We calculate your savings for the upcoming year including all costs (payroll, bookkeeping, Form 1120-S). If savings are under $3K — I'll advise against (stay with regular LLC and avoid the complexity).

2

Reasonable salary determination

We use Bureau of Labor Statistics, Glassdoor, ZipRecruiter — establish the median wage for your profession in your region. Salary must be defensible if IRS audits. I document the calculation method for the file.

3

Form 2553 filing

Filed with IRS no later than March 15 of the year the election should take effect (or retroactively via relief procedure). We complete all 4 pages, get signatures from all shareholders (their spouses too if community-property state), submit via fax + mail with delivery confirmation.

4

Payroll setup

Register as an employer with IRS + state employment agency. Set up Gusto / OnPay / ADP. Configure bi-weekly or monthly payroll runs. Open employer tax accounts (Federal 941, state withholding, state unemployment).

5

Annual Form 1120-S

At year-end I prepare Form 1120-S (S-Corporation return) + K-1 for each shareholder. Due date: March 15 of the following year (extension to September 15 available). K-1 flows to your personal 1040.

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Frequently asked questions — S-Corp election

What an S-Corp is, when it's worthwhile, for NRA, Form 2553, reasonable salary, can it be revoked

S-Corp election is not a separate company — it's a tax regime the IRS applies to your LLC or Corporation after you file Form 2553. Legally you remain an LLC. Tax-wise, the IRS now lets you split profit into salary (subject to FICA) and distributions (not subject to FICA). The salary-portion mechanism saves the 15.3% self-employment tax on the distribution portion.

Want to save $5–15K/year on taxes?

Book a consultation — we'll calculate your personal S-Corp election savings and prepare the transition plan.

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