Critical Deadline Warning
The deadline for S-Corp elections is strict - 75 days after forming your LLC or by March 15th for calendar year LLCs. Miss it and you're stuck with your current election for the entire year. Let our CPAs analyze your situation and recommend the best tax strategy for your LLC.
When Mike started his e-commerce business, he formed an LLC because "everyone said it was simple." Two years later, he was paying $18,000 more in taxes than necessary. His accountant had never mentioned S-Corp elections or explained how LLC tax classifications work. One phone call with our team changed everything.
LLC tax elections are one of the most overlooked opportunities for tax savings. Most business owners don't even know they have options, let alone understand which election saves the most money for their specific situation. Let's break down your choices and how to make the right decision.
Default LLC Taxation: The Starting Point
When you form an LLC, the IRS automatically classifies it based on the number of members. Understanding these default rules is crucial because most LLCs stick with the default - even when it costs them thousands.
Single-Member LLC:
- • Taxed as sole proprietorship (Schedule C)
- • Subject to self-employment tax (15.3%)
- • No separate tax return required
- • All profits taxed as ordinary income
- • Eligible for QBI deduction (up to 20%)
Multi-Member LLC:
- • Taxed as partnership (Form 1065)
- • Each member receives K-1
- • Subject to self-employment tax on distributive share
- • Pass-through taxation (no entity-level tax)
- • More complex compliance requirements
The Self-Employment Tax Problem:
Default LLC taxation subjects ALL business profits to self-employment tax (15.3%). On a $100,000 profit, that's $15,300 in self-employment taxes alone - before income taxes!
S-Corp Election: The Tax Savings Game Changer
The S-Corp election allows your LLC to be taxed as an S-Corporation while maintaining LLC legal structure. This is often the sweet spot for profitable LLCs because it can dramatically reduce self-employment taxes.
How S-Corp Election Works:
- Owner must take "reasonable salary" subject to payroll taxes
- Remaining profits distributed as "distributions" (no self-employment tax)
- Requires payroll processing and additional compliance
- Files Form 1120S (S-Corp tax return)
- Owners receive W-2 for salary + K-1 for distributions
Real Savings Example:
Default LLC Taxation:
- • Business profit: $120,000
- • Self-employment tax: $18,360
- • Income tax: ~$22,000
- • Total taxes: ~$40,360
S-Corp Election:
- • Reasonable salary: $60,000
- • Payroll taxes: $9,180
- • Distributions: $60,000
- • Income tax: ~$22,000
- • Total taxes: ~$31,180
Annual Tax Savings: $9,180
The QBI Deduction: 20% Off Business Income
The Qualified Business Income (QBI) deduction allows eligible business owners to deduct up to 20% of their business income. However, the rules are complex and your tax election affects how much you can claim.
QBI Basics:
- • Up to 20% deduction on qualified business income
- • Income limits: $182,050 (single) / $364,100 (married)
- • Phase-out rules for high earners
- • Limitations for specified service businesses
- • Wage and property limitations above income limits
Tax Election Impact:
- • Default LLC: Full profit qualifies for QBI
- • S-Corp: Only distributions qualify (not wages)
- • C-Corp: No QBI deduction available
- • Partnership: Each partner's share qualifies
- • Must balance QBI vs. self-employment tax savings
Strategic Consideration:
For some businesses, staying with default LLC taxation maximizes QBI deductions even though it means paying self-employment tax. The analysis requires careful calculation of your specific situation.
C-Corp Election: For High-Growth Businesses
C-Corp election subjects your LLC to corporate tax rates but offers unique benefits for businesses that reinvest profits or plan to bring in investors.
C-Corp Benefits:
- • 21% flat corporate tax rate
- • No self-employment tax on profits
- • Better fringe benefits treatment
- • Easier to bring in investors
- • Can retain earnings at lower tax rates
C-Corp Drawbacks:
- • Double taxation on distributions
- • More complex compliance requirements
- • No pass-through of losses
- • No QBI deduction
- • Difficult to convert back
Which Election is Right for Your LLC?
Stay with Default LLC if:
- • Business profits under $40,000 annually
- • Irregular or seasonal income
- • Want maximum simplicity and low compliance costs
- • Planning to take most profits as distributions anyway
Consider S-Corp Election if:
- • Business profits consistently over $60,000
- • Can justify reasonable salary (typically 40-60% of profits)
- • Willing to handle payroll compliance
- • Want to minimize self-employment taxes
Consider C-Corp Election if:
- • High profits that you reinvest in the business
- • Planning to bring in outside investors
- • Want maximum fringe benefits
- • Comfortable with double taxation on distributions
Critical Deadlines You Cannot Miss
S-Corp Election (Form 2553):
- • Within 75 days of LLC formation
- • By March 15th for calendar year LLCs
- • Late election relief possible in some cases
- • Must be filed for each tax year
C-Corp Election (Form 8832):
- • Within 75 days of desired effective date
- • Can be effective up to 12 months prior
- • Requires unanimous member consent
- • More difficult to reverse