Midwest CPA Logo
Book A Call

Should you Make S-Corporation Election?

Why Make S-Corp Election?

As a pass-through LLC your total income is going to be subject to self-employment taxes (also known as FICA taxes) equaling 15.3%. With an S-Corporation this is not necessarily the case. 

This is because when you make an election to be taxed as an S-Corporation you then will start to pay yourself a salary and report it on Form W-2.  This portion of your income is still subject to self employment taxes. 

However, the profit from your business after subtracting out your wages will not be subject to self employment taxes. This has the potential to result in huge savings for you. Checkout how much you can save in the calculator below!

S-Corp Tax Savings Calculator





I Have My Results! What's next?

This calculator is not exact. It only acts as a general guide to show the potential savings that making S-Corp election could have for you. 

That being said the next step is to educate yourself on all the requirements that your business needs to meet in order to qualify to make the election. Those requirements are:

  1. Be a domestic company
  2. Have only allowable shareholders. This would include individuals, certain trusts, and estates.
  3. Have no more than 100 shareholders
  4. Have only one class of stock
  5. Not be an ineligible corporation such as an insurance company or a bank.
If you meet all of these requirements you should still consider all of the additional administrative costs that come with being an S-Corp. One of the largest additional costs will be your tax filing at the end of the year. If you are currently a single member LLC then you are generally going to be reporting your income on Schedule C of your 1040. As an S-Corp you will file using Form 1120-S. This form is more complex than a Schedule C and your tax pro will charge you more for that complexity. 

How do I Make S-Corp Election?

Once you’ve met with a qualified tax professional and determined S-Corp election is right for you, you need to file Form 2553 to make the election. 

This form is due no later than 2 months and 15 days after the beginning of the tax year the election is to take effect. 

Reasonable Salary

A common question that will come up from Midwest CPA clients when making S-Corp election is. How do I determine a “reasonable salary”.

The general rule is to pay yourself what a competitor might pay you if they were to hire you to do the same work that you do now. To determine what a competitor might pay you, you can analyze job postings, salary guides, and even your previous wage if your business is in an industry you were previously employed in. 

Should the IRS analyze your salary they will look at a variety of factors including:

  • Experience
  • Time at work
  • Timing of payments
  • Comparable business salaries
  • Compensation agreements
  • The calculation used to determine salary
  • Responsibilities

Accountable Plan

Another detail you cannot forget when making S-Corp election is to create an accountable plan. This is an internal policy that follows IRS regulations for reimbursing employees for business expenses. 

Without this plan in place you are considered to be on a non-accountable plan. In this case any reimbursements are considered taxable income to be reported on an employees W-2 Form. 

This is incredibly important for a small business owner especially if you are regularly reimbursing yourself for expenses such as your home office, cell phone, or car. 

If you don’t currently have a plan in place reach out to your CPA and they will likely have a template you can use to get started.

While we’ve got you here, why not take a look at our real estate CPA services.

Disclaimer

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, or investment advice. You should consult a qualified legal or tax professional regarding your specific situation.

Scroll to Top