S-Corporation election (Form 2553)

An S-Corporation election (Form 2553) is a tax election available to LLCs and corporations meeting certain ownership rules. The election doesn't change the legal entity — it changes how the IRS taxes the entity.

The self-employment tax saving

A sole proprietor or single-member LLC pays 15.3% self-employment tax on the first $168,600 of net earnings (2026 Social Security wage base) and 2.9% Medicare beyond that — plus 0.9% additional Medicare on income over $200K single / $250K married.

An S-Corp owner-employee takes a reasonable salary subject to payroll tax, and the remaining profit flows through as a distribution not subject to SE tax. The savings on the distribution portion is the core benefit.

The trade-offs

S-Corp comes with real costs:

• Run payroll (Gusto, ADP, etc.) — $50 to $150/month
• File a separate 1120-S return (often $1,500-$3,000)
• State minimum taxes (California $800/year, Illinois fees, etc.)
• Bookkeeping discipline — S-Corps need cleaner books than Schedule C

Reasonable compensation

The IRS requires "reasonable compensation" for the owner-employee. Taking $20K salary and $300K in distributions invites an audit. Documentation matters — a comp study citing BLS data, industry surveys, or comparable role postings is the standard defense.

When to elect

Rule of thumb:

• Under $50K net profit: usually not worth it
• $50K-$75K: depends on state + setup
• $75K-$150K: usually yes
• $150K+: almost always yes

Filing deadlines

The election must be filed within 2 months and 15 days of the start of the tax year for the election to apply that year. Late elections can be filed under Rev. Proc. 2013-30 with reasonable-cause relief.