Type “LLC vs S corp” into Google and most of what comes back treats the two as competing business structures, as if you’re choosing a car color. You’re not. An S corp isn’t something you form. It’s a tax election an already-existing LLC (or corporation) files with the IRS, and the entity underneath doesn’t change at all. Your LLC is still an LLC, with the same liability protection, the same operating agreement, the same state filings. What changes is how the IRS taxes the profit that comes out of it. Comparing the LLC itself with a regular C corporation is a different question, covered in our LLC vs corporation guide.
That distinction matters because it explains why the question “should I be an LLC or an S corp” doesn’t really have an answer. The real question is whether your LLC should keep its default tax treatment or elect to be taxed as an S corp instead. Here’s what that election actually does, what it costs, and one eligibility rule that rules out a large chunk of this site’s readers before they even get to the math.
What the election actually changes
By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership. Either way, all of the LLC’s net profit flows through to the owner’s personal return and is subject to self-employment tax, currently 15.3 percent, covering Social Security and Medicare, on top of ordinary income tax.
File Form 2553 to elect S corp taxation, and the math splits into two buckets. You have to pay yourself a salary as an employee of the business, which is subject to payroll tax the same way any paycheck is. Whatever profit is left after that salary can be paid out as a distribution, and distributions aren’t subject to self-employment tax. That gap, self-employment tax on 100 percent of profit under the default setup versus payroll tax on just the salary portion under an S corp, is the entire reason this election exists.
The catch: reasonable salary
The obvious move is to set your salary as low as possible and take everything else as a distribution. The IRS anticipated that, and the rule is that your salary has to be “reasonable” for the work you actually do, based on your role, your industry, and what similar businesses pay for similar work. There’s no published formula. Some CPAs use 40 to 60 percent of profit as a rough starting point for a gut check, but that’s a heuristic, not a rule, and the IRS doesn’t recognize it as one.
Underpay yourself and get audited, and the agency can reclassify part of your distributions as wages after the fact. That means back payroll taxes, penalties, and interest, on top of whatever you were trying to save. The savings only materialize if the salary you pick would survive scrutiny on its own facts.
What the election costs you
None of this is free to administer. An S corp needs actual payroll, meaning payroll software or a service, withholding, and quarterly filings, plus a separate business tax return, Form 1120-S, on top of your personal return. Budget somewhere in the range of $1,000 to $3,000 a year for payroll processing and the extra return, depending on whether you do it yourself or hire it out.
That overhead is why the election tends to only pay off once net profit clears roughly $40,000 to $80,000, depending on your state and how the salary math shakes out. Below that range, the extra compliance cost can eat most or all of the self-employment tax savings, leaving you with more paperwork and no real gain.
The state that changes the math: California
If your LLC is a California LLC, the break-even point moves further out than it does elsewhere. A default California LLC pays the flat $800 minimum franchise tax. An S corp in California pays the greater of that $800 minimum or 1.5 percent of net income, an extra state-level tax that doesn’t exist for LLCs that skip the election. At higher profit levels that 1.5 percent adds up fast, and it has to be cleared before the federal self-employment tax savings show any real benefit.
The eligibility rule most guides skip
Here’s the part that almost never makes it into a general “LLC vs S corp” article: S corp shareholders have to be US citizens or resident aliens. Nonresident aliens are not eligible shareholders under IRC Section 1361(b)(1)(C), full stop. If even one owner of the LLC is a nonresident alien, the S corp election isn’t just inadvisable, it’s not available, and if it’s made anyway the election terminates the moment an ineligible shareholder holds a share.
That rule closes the door on this election entirely for the readers covered in our guide to forming an LLC as a non-US resident. If that’s your situation, the LLC’s default tax treatment, or in some cases a foreign-owned disregarded entity setup with its own Form 5472 filing requirement, is the only path. S corp status isn’t on the table no matter how the profit math looks.
How and when to file
For an existing calendar-year LLC, Form 2553 is generally due within two months and fifteen days of the start of the tax year you want the election to apply to, which for 2026 lands on March 16 since the 15th falls on a Sunday. Miss that window and the election typically doesn’t take effect until the following year, though late-election relief exists under Rev. Proc. 2013-30 if you have reasonable cause. That relief isn’t automatic, and it isn’t guaranteed just because you file for it.
Frequently asked questions
Do I have to convert my LLC into an S corp?
No. You don’t convert the entity. Your LLC stays an LLC under state law. Electing S corp status only changes how the IRS taxes the profit, filed on Form 2553.
How much profit do I need before S corp status is worth it?
There’s no fixed number, but most CPAs put the practical break-even somewhere between $40,000 and $80,000 in net profit a year, after accounting for payroll and the extra tax return. Below that, the added compliance cost usually cancels out the savings.
Can a non-US resident LLC owner elect S corp status?
No. Nonresident aliens are ineligible S corp shareholders under federal law. If any owner of the LLC is a nonresident alien, the election isn’t available, and attempting it terminates the S corp status immediately.
What happens if the IRS decides my salary was too low?
The IRS can reclassify some of your distributions as wages after the fact, which triggers back payroll taxes, penalties, and interest on the reclassified amount.
