Should I elect to have my LLC taxed as an S Corp?

August 24, 2023

The answer is it depends. Typically, the main tax advantage of an S Corporation lies in potentially reducing self-employment taxes. In an LLC taxed as a sole proprietorship or partnership, all of the business income is subject to self-employment taxes (Social Security and Medicare taxes) for the owner(s). In an S Corporation, only the reasonable compensation paid to owners is subject to these taxes, while remaining profits can potentially be treated as distributions not subject to self-employment taxes. When you elect to be taxed as an S Corp you must start paying yourself and other owners an official paycheck. This means that if you don’t have a payroll system set up you will need to do so. You then pay yourself a reasonable salary (no guidance to exact dollar amount is given by the IRS, but you can imagine it won’t look good if you are paying yourself $100 a month) and collect the rest of the profits of the organization in owner dividends, which are not subject to self-employment taxes. Every LLC will vary in terms of profitability and the amount of owner’s compensation in the form of owner’s draws. It's recommended that businesses consult with tax professionals or financial advisors to assess their specific situation and determine the potential tax benefits of making this election.

Explore Questions

How do I legally protect my business idea?

When does the IRS consider my hobby a business for tax purposes?

How do I build a sales funnel?

Do I need a Registered Agent?

What are the essential financial records I need to keep for my business?

I'm just starting out, how do I build a customer base?

I have an LLC. How do I file my taxes with the IRS each year?

What is the Beneficial Ownership Report and does my business have to do it?

I need to hire my first employee. What do I do?

How do I know if I should do my own accounting or hire an accountant to do it for my business?

In what business situations should I consult an attorney?

What types of business insurance do I need for my business?

What is included in Washington State Excise Tax?

How can I find out if a physical location I am interested in has the right zoning for my type of business?

Can an LLC have investors or shareholders?

Do I need a resellers permit?

How can I ensure that an independent contract I have hired won't be classified as an employee of my business?

How do I understand permitting requirements if I am opening a physical store location?

How much should I charge for my products and/or services?

When should I update my business plan?

How do I know if I need a food cottage permit or if I have to prepare food I am selling for my business in a certified commercial kitchen?

Should I elect to have my LLC taxed as an S Corp?