Can an LLC be taxed as an S Corporation?

Yes, LLC owners have a viable option to elect to have their LLC treated as an S Corporation by the IRS for tax purposes. In this article we will address

  1. what an s corp LLC is;
  2. the LLC with an S Corporation classification; and
  3. the tax advantage this gives the LLC owner.

Info about LLC’s with S Corp status

The advantage for setting up your business as an LLC then electing to have it treated as an S Corporation by IRS is all about lowering the LLC’s tax burden (specifically self-employment or “SE” taxes). This is particularly well-liked by LLC owners, especially when SE taxes on the owners, are high. In your LLC, your entire net income is taxed at 15.3% self-employment tax towards Social Security and Medicare or FICA taxes. With S Corporation status though, the LLC owner has the option of dividing up income into (1) salary and (2) passive income, also called distributions or dividends. Only your salary is subject to the SE tax; SE taxes do not pertain to your distributions. As the owner of the LLC, your salary needs to be reasonable. For example you cannot take a salary of $10,000 while taking $100,000 in distributions.

Legally, your business is still an LLC, not a corporation. So you have all the advantages of the LLC including fewer filings with the state, less paperwork, and lower costs than a corporation.

For IRS purposes though, your business is treated as an S Corporation. Only salaries paid to you are earned income and are subject to SE taxes. The S Corporation can “pass-through” other earnings as passive income or distributions to owners. Basically, you save on SE taxes, which is the main benefit of electing an S Corp status for your LLC.

Electing S Corp Status For Your LLC

If you are going to be electing S Corp status for your LLC you will need to file Form 2553 with the IRS. It’s simple paperwork but there are deadlines and rules to follow. If your LLC is new, for example, you have 75 days to file this form timely.

Please note that tax issues are complex. As such, you must not rely on this article or website as tax advice. This website and/or article above is not a substitute for the advice of an attorney or tax professional. According to IRS Circular 230 to ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this writing was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.
On April 7, 2016   /   LLC FAQs, LLC Taxation, Starting an LLC   /   Leave a comment

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