Elect S corp status
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A sole proprietorship or single-member LLC pays self-employment tax, about 15.3% on most of it, on all of its profit. Electing S corp status changes that: you pay yourself a reasonable salary, which carries payroll tax, and the rest of the profit can come out as distributions, which don't.
The election isn't free. It adds payroll, a separate business tax return and more bookkeeping, so it pays off only once profit is comfortably above the salary you'd have to pay yourself.
How it works
A company that reports on your own return pays self-employment tax on all its profit. As an S corp, it pays you a salary and the rest can come out as distributions without that tax.
Estimate your savings with the S corp savings calculator →
What makes it hold up
- Form 2553 filed by March 15 to start that year
- Payroll set up for your salary
- A separate S corp return each year
Risks
Moderate. It adds payroll and a separate return, and the salary has to be reasonable. It only pays off above a certain profit.
Questions to ask your CPA
- At this company’s profit, does S corp status save more than it costs?
- What salary would you set?
- Is it too late for this year?
Common questions
Can an LLC be an S corp?
Yes. An LLC can elect to be taxed as an S corp by filing Form 2553. It stays an LLC under state law; only its tax treatment changes.
When is the deadline?
To start S corp treatment for a calendar year, file Form 2553 by March 15 of that year. Relief is sometimes available for a late election, so ask your CPA before assuming it's too late.
At what profit does it make sense?
It depends on the salary you'd need to pay and what payroll and the extra return cost you. Cratchit compares the payroll tax saved with those costs at your actual profit.
What changes once I elect?
You run payroll for yourself, file an S corp return each year, and take the rest of the profit as distributions. Your books need to keep salary and distributions clearly apart.
Cratchit runs every strategy in this library against your real numbers, rates it, and keeps the records that make it hold up. Take a guided tour with the Harpers, a sample family.
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Education, not advice. Tax law changes and every situation is different, so confirm the details with your CPA or tax advisor before acting. This page was last checked against tax law as of October 2026, including the 2025 tax law, in October 2026.