Learn how you can have your single-member LLC be taxed as an S corporation.
The default federal tax status for a single-member limited liability company (SMLLC) is disregarded entity. However, the owner of an SMLLC can elect to have the business taxed as either a traditional C corporation or as an S corporation. An S corporation is a special type of small, closely-held corporation. This article briefly covers SMLLCs taxed as S corporations.
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An S corporation, like a typical LLC or sole proprietorship (but unlike a traditional corporation), is subject to pass-through taxation. In other words, the responsibility for paying income tax passes through the business to you personally.
To elect S corporation tax status, you need to file IRS Form 2553, Election by a Small Business Corporation. You can file an election for S corporation tax status at any time after setting up your SMLLC. However, there are limitations on when the election can take effect. Specifically, your S corporation tax status must become effective within the 75-day period before you file the form or within 12 months after you file it. Electing S corporation tax status means you'll have to file additional tax documents each year, such as Form 1120S, U.S. Income Tax Return for an S Corporation.
Both SMLLCs and S corporations have pass-through taxation. Moreover, being taxed as an S corporation involves more paperwork than an SMLLC. So why would you choose S corporation tax status? The most common answer is: As a way to reduce self-employment taxes while keeping pass-through taxation. As the owner of an SMLLC classified as an S corporation you are not considered a self-employed individual and are not subject to federal self-employment tax. Instead, you are considered to be an employee, and—the key point—you can take some, but not necessarily all, available profits from your company as a salary.
Other SMLLC profit, if any, can be taken as a dividend, which is not subject to any employment-related taxes, nor—unlike with a C corporation—to double taxation. By contrast, all profit from a SMLLC classified as a disregarded entity is subject to self-employment tax. In short, if your SMLLC is classified as an S corporation for tax purposes, you'll avoid employment taxes on money you receive from the company in the form of a dividend.
In light of the fact that, with a SMLLC taxed as an S corporation, you pay employment-related taxes on a salary but not on dividends, you might think that you should just take all your money from the SMLLC as a dividend, and thus avoid paying self-employment taxes altogether. This approach, however, is prohibited. The IRS is very clear that you must pay yourself at least "reasonable compensation."
For various reasons, choosing S corporation status strictly to try to save on self-employment taxes can be a questionable proposition. However, if you're seriously considering this approach, you should check with both a lawyer and a tax expert to make sure your SMLLC is properly organized, meets all IRS guidelines, and that re-classification is financially worth your while.
TIP:
It can be difficult to know when compensation is reasonable. In one important legal case, the court listed nine different factors that might be considered in determining the reasonableness of compensation. Similarly, the IRS currently has a list of ten factors. By way of trying to ensure that compensation will pass muster as "reasonable," some accountants apply a 60/40 rule, where at least 60% (a clear majority) of profit is taken as salary and the rest as a dividend. It can also be useful to check for information on comparable businesses using sources like the U.S. Bureau of Labor Statistics or employment agencies.
EXAMPLE: Simon formed her gourmet catering business ten years ago as an SMLLC. Six years later, he elected to have it taxed as an S corporation. Last year the business did very well and he had a net profit of $100,000. He knows that other people doing the same kind of work normally earn $50,000-$60,000 per year. He also checked with some government websites and his accountant for additional confirmation that $60,000 is a reasonable salary. He then paid himself a salary for the year of $60,000 (making sure to have his SMLLC deduct employer taxes for Social Security and Medicare, and also making sure to pay his own share of those taxes on his personal tax return). Simon took the remaining $40,000 as a dividend—and didn't have to pay any employment taxes on that money.
For additional information on any of the issues covered here, including avoidance of self-employment taxes and reasonable salaries, check irs.gov or consult with a tax professional. For other general information related to taxation of SMLLCs, check out the other tax-related articles in the SMLLC section of this website.
FAQs
To elect S corporation tax status, you need to file IRS Form 2553, Election by a Small Business Corporation. You can file an election for S corporation tax status at any time after setting up your SMLLC. However, there are limitations on when the election can take effect.
Can single-member LLC elect S corp status? ›
A single-member LLC can be taxed as an S Corporation if it meets the IRS's eligibility criteria. In fact, both single-member and multi-member Limited Liability Companies can elect to be treated by the IRS as either an S Corporation or a C Corporation if they meet the requirements.
Can you convert a single-member LLC to an S corp? ›
An LLC can also elect to be taxed as an S corporation, even if it only has one owner. Electing S corp. taxation doesn't convert your business structure from an LLC to a corporation. It simply changes the way you file and pay taxes and handle owner income.
Does a single-member LLC need to file form 2553? ›
As an SMLLC (single-member limited liability company), taxes can be burdensome if one is paying taxes on all the profits that they receive from their company. However, IRS form 2553 can be filed, which would allow the SMLLC to reap the tax benefits of an S-Corp.
Can a single person have an S corporation? ›
As a single member LLC, you can elect to be taxed as an S-Corp as long as the election is made no more than two months and 15 days after the beginning of the tax year you want the election to go into effect. You make the election on form 2553.
What is the difference between a single-member LLC and a single member S Corp? ›
One of the main differences between an S corp and a limited liability company is the treatment of self-employment taxes. With an S corp, owners can pay themselves a salary subject to payroll taxes, while the remaining profits are distributed as dividends and not subject to self-employment taxes.
Do I need a new EIN if I change from single-member LLC to multi member LLC? ›
Generally, businesses need a new EIN when their ownership or structure has changed.
Do I need a new EIN when converting from LLC to S corp? ›
The same EIN can be used for your business as an S corp. However, if there are changes in the ownership structure, or if you are directed by the IRS to obtain a new EIN for specific reasons related to the conversion, you may need to apply for a new EIN.
How much does it cost to convert LLC to S corp? ›
So, technically, it costs nothing to change an LLC to an S-corp. However, you may need to pay some fees after filing Form 2553. For example, if you check the box Q1 to establish a “business purpose”, you'll need to pay a fee of $6,200.
When should an LLC become an S corp? ›
In general, you'll want to consider electing S-corp tax status for your LLC if your business is generating sufficient profits to pay a reasonable salary to the members and annual distributions. You should review your specific situation with a tax advisor before making the switch.
Disadvantages of a single-member LLC
While there are many good reasons to choose a single-member LLC for your business, there are disadvantages to be aware of as well. The first of these is cost. An LLC is subject to state formation fees, as well as ongoing fees such as annual report fees and franchise taxes.
Should I file form 8832 or 2553? ›
If you're an LLC or partnership, use Form 8832 if you want to be taxed as a C-corp, partnership, or a sole proprietor. Meanwhile, Form 2553 is for LLCs or corporations that want to be taxed as S-corps. Keep this in mind: If you're filing Form 2553, you don't need to file Form 8832.
Does single member S Corp need payroll? ›
Shareholders, if they perform work for the business, are also considered employees and must earn a salary. As a result, most S corporations, even if they only have one shareholder/employee, need a reliable means of running payroll.
How to elect S Corp status for single-member LLC? ›
To elect S corporation tax status, you need to file IRS Form 2553, Election by a Small Business Corporation. You can file an election for S corporation tax status at any time after setting up your SMLLC. However, there are limitations on when the election can take effect.
Is a single-member LLC taxed as an S corp a disregarded entity? ›
Determining disregarded entity status
Even those single-member LLCs owned by S corporations qualify as disregarded entities. All single-member LLCs are by default considered disregarded entities. This means that the IRS does not treat your LLC as an entity separate from you, its owner, when it comes to income taxes.
Can a single-member LLC file a 1120s? ›
However, if a qualifying LLC elected to be an S Corporation, it should file a Form 1120-S, U.S. Income Tax Return for an S Corporation and S corporation laws apply to the LLC. Each owner reports their pro-rata share of corporate income, credits and deductions on Schedule K-1 (Form 1120-S) PDF.
Can a sole proprietor be taxed as an S Corp? ›
Companies that operate as S corporations have a tax status under IRS rules that can apply to two business structure types: the limited liability company (LLC) or C corporation. This means that a sole proprietorship must incorporate as an LLC or C corp before obtaining S corp status.
When can you elect S Corp status? ›
at any time on or before the fifteenth day of the third month of the current tax year. Entity seeking S corporation status must first qualify as a corporation for tax purposes.
Can a limited partnership elect S Corp status? ›
A domestic entity eligible to be treated as a corporation, or those entities that would be treated under tax law as a partnership or disregarded entity, may elect to be treated as an S corporation. These entities include domestic partnerships and limited liability companies under state law.
How do you classify a single-member LLC? ›
According to the IRS, a single-member limited liability company is a "disregarded entity", meaning there is no separation between the business and its owner. By default, the IRS taxes it the same as a sole proprietorship.
