What an S-corp election is
It's a tax status, not a type of business. An LLC or corporation files IRS Form 2553 to be taxed under Subchapter S. The business generally pays no federal income tax itself; profit passes through to the owners' personal returns. What changes day to day: owners who work in the business go on payroll, and only that salary bears payroll tax. Your LLC stays an LLC.
Where the savings come from
A sole proprietor pays 15.3% self-employment tax on nearly all profit. An S-corp owner pays payroll tax only on salary. Both figures below use $100,000 of profit.
15.3% = 12.4% Social Security (on the first $184,500 of earnings in 2026) + 2.9% Medicare. Self-employment tax applies to 92.35% of profit.
The same comparison at three profit levels, before income tax:
| Profit | Salary (illustrative) | Sole-prop SE tax | S-corp payroll tax | Gross savings | Costs (est.) | Net payroll-tax savings |
|---|---|---|---|---|---|---|
| $50,000 | $35,000 | $7,065 | $5,355 | $1,710 | ~$2,000 | −$290 |
| $100,000 | $55,000 | $14,130 | $8,415 | $5,715 | ~$2,000 | $3,715 |
| $200,000 | $90,000 | $28,234 | $13,770 | $14,464 | ~$2,000 | $12,464 |
Single owner, 2026 federal payroll tax only. Salaries are illustrations, not recommendations. Costs assume about $2,000 a year for payroll service and the extra business return. Income tax shrinks these figures; the totals are in the next section.
Savings by profit level
Savings grow with profit. At $50,000 they don't cover the cost of running payroll.
| Profit | Salary | Sole-prop total tax | S-corp total tax | Tax saved | Net after ~$2,000 costs |
|---|---|---|---|---|---|
| $50,000 | $35,000 | $9,732 | $8,558 | $1,174 | −$826 |
| $100,000 | $55,000 | $22,365 | $18,864 | $3,501 | $1,501 |
| $200,000 | $90,000 | $53,430 | $43,902 | $9,528 | $7,528 |
Single filer, 2026 federal income tax plus both halves of payroll tax — an S-corp owner bears the employer share too. State and local tax excluded. Salaries are illustrations, not recommendations.
The full picture
Income tax takes back part of the payroll-tax savings, but the S-corp still comes out ahead. Taxable income actually goes up under the S-corp (salary doesn't qualify for the 20% QBI deduction, and the half-SE-tax deduction disappears), yet total tax goes down, because the payroll-tax savings are bigger.
Stacking a SEP-IRA and a family HSA on top, married filing jointly, $250,000 profit, $80,000 salary:
| Setup | Total federal tax | Saved vs. sole prop |
|---|---|---|
| Sole proprietor | $54,727 | — |
| S-corp | $41,023 | $13,704 |
| S-corp + SEP-IRA | $37,503 | $17,224 |
| S-corp + SEP-IRA + family HSA | $35,578 | $19,149 |
Before the roughly $2,000 a year of payroll and filing costs.
What your state can take back
The election is a federal choice, and states don't all follow it. Some tax an S-corp's net income directly, and that tax comes straight out of the federal savings above. California charges S-corps 1.5% with an $800 minimum, and New York City doesn't recognize the S election at all. Check your state and city before you elect: where an S-corp is taxed, the profit at which the election starts paying off is higher than the federal numbers alone suggest.
When to consider it
Consider electing when all four are true
- Profit is steady, not a one-off year
- After a fair salary, real profit is left over, typically at $60,000–$80,000+ of profit, higher in states that tax S-corps
- You're ready to run payroll and keep clean monthly books
- All owners are eligible, with one class of ownership
Not yet if
- The business is losing money or brand new
- Income swings widely from year to year
- You plan to raise venture capital; investors want a C-corp that can issue preferred stock
- An owner is a non-US resident or another company
The rule that makes or breaks it: reasonable salary
The IRS requires a market-rate salary before any distributions, and an underpaid owner is the classic audit target. In Watson v. United States (8th Cir. 2012), an accountant's S-corp paid him $24,000 a year in salary and the rest as distributions. An IRS expert valued his services at about $91,000 a year, and the court upheld treating that amount as wages. Base the salary on industry pay data, your role and your hours, and document how you set it.
The trade-offs
- •Payroll: withholding, quarterly filings, W-2s
- •A separate business return (Form 1120-S, due March 15) and a K-1 for each owner
- •Retirement contributions are based on salary only
- •Profit and distributions follow ownership percentage, with no special allocations
- •Hard to undo: after the election ends, you generally wait five years to elect again
How and when to elect
For 2027, file Form 2553 by Monday, March 15, 2027. File within 2 months and 15 days of the start of the tax year, or any time during the year before. An officer signs and every shareholder consents. An eligible LLC files Form 2553 directly. Missed it? Late-election relief under Rev. Proc. 2013-30 can apply within 3 years and 75 days with reasonable cause.
Common questions
- Is an S-corp a different kind of business from an LLC?
- No. It's a tax status. An LLC or corporation files Form 2553 to be taxed as an S-corp, and the legal entity stays the same.
- At what profit does an S-corp election make sense?
- Usually once steady profit reaches about $60,000–$80,000 or more, leaving real profit after a fair salary. In a state that taxes S-corps, the break-even is higher.
- How much can an S-corp save?
- In 2026 examples for a single owner, about $1,500 a year at $100,000 of profit and $7,500 at $200,000, after income tax and roughly $2,000 a year of payroll and filing costs. At $50,000 it costs more than it saves.
- What is reasonable compensation?
- The salary you'd have to pay someone else to do your job. The IRS requires it before distributions and can reclassify distributions as wages if salary is too low.
- What's the deadline to elect S-corp status for 2027?
- Monday, March 15, 2027, for a calendar-year business. Late-election relief is available in some cases under Rev. Proc. 2013-30.
- Do states tax S-corps?
- Not all states follow the federal election. California charges S-corps 1.5% with an $800 minimum, and New York City doesn't recognize the S election at all. Some states also tax an S-corp's net income directly, which comes straight out of the federal savings. Check your state and city before you elect.