Should Your LLC Be Taxed as an S-Corporation?
Should Your LLC Be Taxed as an S-Corporation?
Many small business owners form LLCs for their flexibility and legal protection—but when it comes to taxes, an S-Corporation election can provide big benefits if done correctly. Here’s what you need to know before making the switch.
IRS Requirements for LLCs Electing S-Corp Taxation
By default, an LLC is taxed as:
A sole proprietorship (for single-member LLCs), or
A partnership (for multi-member LLCs).
To be taxed as an S-Corporation, your LLC must formally elect this status with the IRS.
How to File the Election
Complete IRS Form 2553 – Election by a Small Business Corporation.
File the election no later than 2 months and 15 days after the start of the tax year you want it to apply (for most calendar-year businesses, that means March 15).
If you missed that deadline, you may still qualify for late election relief under Revenue Procedure 2013-30, as long as reasonable cause can be shown.
Eligibility Rules for S-Corp Status
Your LLC must:
Be domestic (U.S.-based)
Have 100 or fewer owners (members)
Have eligible owners only (individuals who are U.S. citizens or residents, certain trusts, or estates)
Have one class of ownership interest (no preferred shares)
Not be ineligible (e.g., insurance or certain financial institutions)
Ongoing IRS & Payroll Requirements
After your election is accepted, your LLC must follow corporate compliance rules.
1. Reasonable Payroll
Owner-employees must receive reasonable compensation via payroll (Form W-2).
Payroll must include federal, Social Security, Medicare, and state withholdings.
2. Tax Filings
File Form 1120-S annually for the business
Issue Schedule K-1s to owners
File quarterly 941 payroll returns, state payroll reports, and annual W-2s/W-3s
Maintain proper accounting records and separate business accounts
3. State-Level Compliance
Don’t forget annual reports, franchise fees, and local occupational taxes—these vary by state and locality (e.g., Kentucky Secretary of State Annual Report, Boone County tax filings, etc.).
Benefits and Considerations
Why many LLCs choose S-Corp status:
✅ Potential self-employment tax savings
✅ Ability to take distributions separate from salary
✅ Flexibility to contribute to retirement and benefit plans
Things to keep in mind:
⚠️ Payroll setup and quarterly filing requirements add complexity
⚠️ IRS scrutiny on “reasonable salary”
⚠️ Must maintain clean bookkeeping and records
Need Help Deciding?
At Baker Business & Tax Services PLLC, we help small businesses understand when an S-Corporation election makes sense—and ensure it’s done correctly with ongoing compliance support for payroll, accounting, and tax filings.
📍 Located in Fort Thomas, Kentucky
📞 859-216-2551 | ✉️ info@bakeracct.com
🌐 www.bakeracct.com
Helping small businesses save taxes—legally and strategically.