How to Elect S Corporation Tax Status for an LLC
An LLC elects S corporation tax status by filing IRS Form 2553, signed by every member, no more than two months and fifteen days after the start of the tax year the election should take effect, or anytime during the prior year. The LLC must have 100 or fewer members, only individuals, certain trusts, or estates as members, and only one class of ownership interest. Once elected, any member who works in the business must be paid reasonable W-2 compensation before taking further profit distributions.
By LLC Register · Last reviewed October 1, 2026
Comprehensive Guide
What Electing S Corporation Status Actually Changes
An LLC is a state-law business structure; its federal tax treatment is a separate choice. By default, the IRS taxes a single-member LLC as a disregarded entity and a multi-member LLC as a partnership. Filing Form 2553 doesn't change the LLC's legal structure at all; it changes only how the IRS taxes it, treating it as an S corporation for federal income tax purposes while it remains an LLC under state law. The main reason owners make this election is potential self-employment tax savings: an S corporation only pays employment tax on the reasonable salary paid to working owners, not on additional profit distributed beyond that salary, unlike a default partnership or disregarded LLC, where all business profit is typically subject to self-employment tax.
Eligibility Requirements
Per the IRS, an entity electing S corporation status can have no more than 100 shareholders (members, for an LLC), counting a married couple and their estate as a single shareholder. Only individuals, estates, certain exempt organizations, and certain trusts can hold an ownership interest; another LLC, corporation, or partnership cannot be a member once the election is in place. The entity must also have only one class of stock, disregarding differences in voting rights, meaning every member's economic interest must follow the same profit and loss ratio, with no special allocations that differ by member.
Filing Form 2553
Form 2553, Election by a Small Business Corporation, must be signed by every member (shareholder) consenting to the election, along with the LLC's basic information and its chosen tax year. You need an EIN before filing, since the form requires one; if your LLC doesn't have one yet, apply for it first. Per the IRS, the form must be filed no more than two months and fifteen days after the beginning of the tax year the election should take effect, or at any time during the tax year immediately before it. For a calendar-year LLC, that means filing by March 15 for the election to apply to the current year.
Missing the Deadline: Late Election Relief
Missing the Form 2553 deadline doesn't necessarily end the option for that year. Under Revenue Procedure 2013-30, an entity can request late election relief if it intended to elect S corporation status, is otherwise eligible, has reasonable cause for the late filing, and has reported its income consistently with S corporation treatment for the year in question and every year since. This relief is generally available if less than 3 years and 75 days have passed since the election's intended effective date. The request is made by filing Form 2553 with a statement explaining the reasonable cause, attached to the LLC's tax return for the relevant year.
Reasonable Compensation Is Not Optional
Once the election is in place, any member who works in the business must be paid a reasonable salary through payroll, subject to employment taxes, before taking further profit as a distribution. The IRS doesn't publish a fixed formula for "reasonable," but it looks at what the business would have to pay an unrelated person to do the same work. Courts have repeatedly ruled that a shareholder-employee owes employment taxes on what amounts to wages even when a business tries to label that pay as a distribution instead, so this isn't a gray area to plan around aggressively.
After the Election: Form 1120-S
Once the S corporation election is in effect, the LLC files Form 1120-S annually instead of a partnership or disregarded-entity return, and issues each member a Schedule K-1 reporting their share of income. Running payroll for working members, and the extra accounting that comes with separating salary from distributions, adds administrative cost and complexity compared to the LLC's default tax treatment, which is worth weighing against the potential self-employment tax savings before you file.
Practical Considerations
This Only Makes Sense Above a Certain Profit Level
The potential self-employment tax savings from an S corporation election come from the gap between a reasonable salary and total profit; a business with thin margins or little profit beyond what a fair salary would be doesn't have much left to save on, while payroll costs and extra tax preparation still apply regardless. Model the numbers for your specific business before electing, rather than assuming the election saves money by default.
Talk to a Tax Professional Before You File
Whether the S corporation election benefits your LLC depends on your profit level, your state's tax treatment of S corporations (which doesn't always mirror federal rules), and how much administrative cost you're willing to take on for payroll and separate tax filings. This is a tax election with real tradeoffs, not a default best practice, so get professional advice specific to your numbers before filing Form 2553.
Revoking the Election Has Its Own Rules
If the S corporation election stops making sense later, revoking it requires a separate filing and the consent of shareholders holding a majority of shares, and generally can't be done and then re-elected again within five years without IRS consent. Treat the election as a multi-year commitment rather than something to toggle on and off as circumstances shift.
Keep Payroll Running Consistently
Once elected, skipping payroll for a working member in a given year, even informally, is one of the most common and most scrutinized compliance failures the IRS looks for in S corporations. Set up payroll through a proper system from the start rather than treating owner pay as an afterthought.
State Tax Treatment Can Differ From Federal
Some states follow the federal S corporation election automatically, while others require a separate state-level election, tax S corporations differently than federal law does, or don't recognize the election at all for state tax purposes. Check your specific state's rules before assuming your state tax bill changes the same way your federal return does.
Budget for the Added Accounting Cost
Running payroll, filing Form 1120-S, and issuing Schedule K-1s to every member typically costs more in accounting fees than a default partnership or disregarded-entity return. Include this added cost in your calculation of whether the election is worth it, rather than only comparing the headline self-employment tax savings.
Sources
The official sources used for this article.
IRS: About Form 2553 | irs.gov/forms-pubs/about-form-2553 |
|---|---|
IRS: Instructions for Form 2553 | irs.gov/instructions/i2553 |
IRS: Late election relief | irs.gov/businesses/small-businesses-self-employed/late-election-relief |
IRS: S corporation employees, shareholders and corporate officers | irs.gov/businesses/small-businesses-self-employed/s-corporation-employees-shareholders-and-corporate-officers |
Created by: LLC RegisterLast reviewed October 1, 2026
Updated: October 1, 2026
Frequently Asked Questions
What is the deadline to file Form 2553 for an LLC?
Per the IRS, Form 2553 must be filed no more than two months and fifteen days after the start of the tax year the election should apply to, or anytime during the prior tax year. For a calendar-year LLC, that's generally March 15.
Can a multi-member LLC owned by another LLC elect S corporation status?
No. Only individuals, certain estates, and certain trusts can be members once the S corporation election is in place; another business entity cannot hold an ownership interest in an LLC taxed as an S corporation.
What happens if an LLC misses the S corp election deadline?
It may still qualify for late election relief under Revenue Procedure 2013-30 if it has reasonable cause, intended to elect on time, and has reported income consistent with S corporation treatment since, as long as less than 3 years and 75 days have passed.
Does an LLC taxed as an S corp have to pay its owners a salary?
Yes, if the owner works in the business. The IRS requires a reasonable W-2 salary for services performed before any further profit is taken as a distribution, and courts have upheld this even when businesses label wages as distributions instead.
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