The S-Corporation election can provide significant tax savings for small business owners, but timing and eligibility requirements are crucial. Here's what you need to know.
What is an S-Corp Election?
An S-Corporation election (Form 2553) allows your LLC or corporation to be taxed as an S-Corp, potentially saving thousands in self-employment taxes while maintaining the liability protection of your business entity.
Key Benefits
The primary benefit is avoiding self-employment tax (15.3%) on distributions above your reasonable salary. For example, if your business profits $100,000 and you pay yourself a $60,000 salary, you only pay self-employment tax on the salary, not the $40,000 distribution.
Critical Timing Rules
For new entities, you must file Form 2553 within 2 months and 15 days of formation. Existing entities must file by March 15 for the election to be effective for the current year.
The S-Corp election is a significant decision that affects your taxes, payroll, and compliance obligations. Work with a qualified CPA to analyze your specific situation and determine if the election makes sense for your business.