When you form an LLC or corporation and elect S-corp tax treatment with the IRS, you're changing how the business's income is taxed — not how the business itself is structured. The entity remains an LLC (or corporation) under state law. What changes is the federal tax classification.

As the default single-member LLC owner, 100% of net business profit flows to Schedule C on your personal return, and 100% of that profit is subject to self-employment tax (15.3% up to $176,100 in net earnings in 2025, and 2.9% on amounts above that).

As an S-corp, you become an employee of your own business. You pay yourself a reasonable salary — subject to FICA payroll taxes — and any remaining profit you take out is distributed to you as a shareholder distribution, which is not subject to self-employment tax. The savings come from that distribution portion.

Suppose your LLC nets $150,000 in 2025. As a sole proprietor or disregarded LLC, you'd owe SE tax on the full $150,000 — roughly $19,000. As an S-corp paying yourself a $80,000 reasonable salary, you'd owe payroll taxes on $80,000 (about $12,240) and take the remaining $70,000 as a distribution with no SE tax. Estimated savings: ~$6,700. Your accounting and payroll costs to run the S-corp might be $2,000–$3,000 per year, leaving a net benefit of $3,700–$4,700 annually — and those savings scale upward as income grows.

The election makes financial sense when the annual tax savings consistently exceed the additional compliance costs. Most tax professionals put that threshold somewhere between $50,000 and $80,000 in net profit — but it depends on your specific situation, your state's treatment of S-corps, and what you'd pay an accountant and payroll service.

Before electing, confirm all of the following:

Your business is a U.S. domestic entity (LLC or corporation) You are a U.S. citizen or permanent resident The business has no more than 100 shareholders All shareholders are individuals, certain estates, or certain trusts (not other corporations or partnerships) There is only one class of stock (or, for an LLC, one class of membership interest) If your LLC currently has two members with different economic rights, you may not qualify for S-corp status without restructuring.

Form 2553, "Election by a Small Business Corporation," is the document you file with the IRS to make the S-corp election. Here's how to do it correctly.

Download Form 2553 directly from irs.gov/form2553. The current revision is from December 2017; check for any updates on the IRS website before filing.

Part I is where most of the required information lives:

Line A: Your corporation/LLC's exact legal name as registered with your state Line B: Employer Identification Number (EIN) — you must have an EIN before filing Line C: Date incorporated or organized (from your Articles of Organization) Line D: State of organization Line E: The effective date you want the S-corp election to begin Line F: Your tax year (most small businesses use the calendar year, ending December 31) Line G and H: Whether you're adopting, retaining, or changing your tax year Lines I and J: Contact information and representation details if applicable Every shareholder (or, for an LLC, every member) must sign the consent statement in the shareholder section of Part I. For a single-member LLC, that's just you.

Timing is critical. To have the election effective for the current tax year, Form 2553 must be filed:

No later than 2 months and 15 days (75 days) after the beginning of the tax year you want the election to take effect, OR At any time during the preceding tax year In plain terms: if you want S-corp treatment for 2026, you need to file Form 2553 by March 17, 2026 (two months and 15 days after January 1). If your LLC was formed during the year — say, October 1, 2025 — you have until December 15, 2025 (75 days after formation) to elect S-corp status effective from formation.

Miss the deadline? The IRS does offer late election relief under Rev. Proc. 2013-30, which allows retroactive elections in many cases — but it requires additional statements, documentation of reasonable cause, and clean tax filing history. It's doable, but it's extra work. File on time.

Form 2553 can be faxed or mailed (not filed online — the IRS has not yet created an e-file option for this specific form). The correct address or fax number depends on your state. Find the current list at irs.gov/form2553 under "Where to File." After filing, you should receive confirmation from the IRS within 60 days. If you haven't heard back, call the IRS Business line at 800-829-4933.

Once the IRS approves your S-corp election, you have new compliance obligations that don't exist for a plain LLC:

You must run payroll. The IRS requires S-corp owner-employees to receive a "reasonable salary" before taking distributions. There's no hard formula, but the salary should reflect what you'd pay someone else to do your job in an arm's-length transaction. Underpaying yourself a trivial salary to maximize untaxed distributions is a known audit trigger. The IRS has successfully reclassified distributions as wages in court cases where the salary was clearly unreasonable.

A reasonable process: look at industry salary data (Bureau of Labor Statistics, industry surveys, comparable job postings), document your reasoning, and set a salary that reflects what the market would pay for your skills and time. Many solopreneurs set their S-corp salary between 40-60% of net income, but this varies significantly by profession.

File Form 1120-S annually. The S-corp files its own federal tax return (Form 1120-S) plus Schedule K-1 for each shareholder. Your accountant will handle this, but it's a separate return beyond your personal 1040.

Run quarterly payroll. You'll need to file Form 941 (Employer's Quarterly Federal Tax Return) and deposit payroll taxes on a scheduled basis. Use a payroll service — Gusto, QuickBooks Payroll, or ADP — to manage this. Manually running payroll is error-prone and time- consuming.

File W-2 and W-3 at year end. You'll receive a W-2 from your own S-corp and report that salary on your personal return, just as you would from any employer.

Not all states treat S-corp elections the same way. California imposes an additional 1.5% franchise tax on S-corp net income (minimum $800). New York City does not recognize the S- corp election for city tax purposes, meaning NYC-based S-corps pay a separate city business tax. Tennessee and Texas have their own franchise taxes that apply regardless of S-corp status. Check your state's revenue department before electing.

For a solopreneur consistently netting $100,000 or more, the S-corp election almost always makes financial sense — assuming you're willing to handle the compliance. The math works, the structure is well-established, and plenty of solopreneurs run S-corps every year without incident.

What it is not is a set-it-and-forget-it decision. It requires ongoing attention to payroll, reasonable salary documentation, and separate tax filings. Budget for an accountant who specializes in small business taxation. Their fee will be more than offset by what you save.

Unsure whether your current LLC structure needs to change before electing? See our guide: How to Choose the Right Business Structure.

Before electing, make sure the underlying entity is right — review how to choose a business structure — then plan for payroll by setting up proper bookkeeping and budgeting for quarterly estimated taxes.