S-Corp Election

Elect S-Corporation status for tax savings.

You’ve heard people talk about S-Corps like they’re some magical tax loophole. They’re not magic, but they can save you real money — $5,000,$10,000, even more per year if your situation is right.

Here’s the catch: an S-Corp isn’t actually a business entity. It’s a tax election. You form an LLC or Corporation first, then file Form 2553 with the IRS to be taxed as an S-Corp.

How S-Corps save you money

The benefit comes down to one thing: self-employment tax savings.

With a regular LLC, you pay self-employment tax (15.3%) on all your profits. With an S-Corp, you only pay it on the wages you pay yourself. Everything above your salary passes through without self-employment tax.

A real example

You’re a consultant. Your business makes $150,000 in profit.

Structure	Self-employment tax
Regular LLC	$21,195 (15.3$150,000)
S-Corp (paying yourself $80,000 salary)	$12,240 (15.3$80,000)

That’s $8,955 saved per year — enough to pay for accounting software, business insurance, and a nice dinner to celebrate.

You must pay yourself a “reasonable salary” before taking distributions. The IRS watches for S-Corps that pay unreasonably low salaries, and they’ll reclassify your distributions as wages if they catch you.

When S-Corp makes sense

S-Corp election typically saves you money when:

• Your business profits exceed $60,000-$80,000 annually
• You’re currently paying significant self-employment tax
• You can handle the additional payroll complexity
• Your situation fits within S-Corp restrictions

Below $60,000 in profit, the savings often don’t outweigh the added complexity and payroll costs.

S-Corp restrictions

Not everyone can elect S-Corp status:

Restriction	Limit
Shareholders	Maximum 100
Shareholder types	US citizens and residents only — no foreign owners
Stock classes	Only one class of stock (voting differences OK)
Entity shareholders	No corporations or partnerships as shareholders (some trusts OK)
Fiscal year	Generally must use calendar year

Planning to raise venture capital? S-Corp probably won’t work. Investors want preferred stock (multiple classes) and may include foreign investors or investment funds.

Electing S-Corp status

1. Form your entity first

   Create your LLC or Corporation. You can’t elect S-Corp without an underlying entity to elect for.

2. Get your EIN

   You need a federal tax ID before filing Form 2553.

3. File Form 2553

   Submit to the IRS. All shareholders must sign. Pluvel files this for you.

4. Wait for confirmation

   The IRS sends a determination letter confirming your S-Corp status. Usually takes 60-90 days.

Filing deadlines

When you want S-Corp status	File Form 2553 by
From the beginning of the tax year	March 15 of that year
From formation	Within 75 days of formation
Starting next year	Anytime during the current year

Missed the deadline? The IRS accepts late elections with “reasonable cause.” Pluvel can help you file for late election relief — it usually works if you have a legitimate reason.

The “reasonable salary” requirement

The IRS requires S-Corp owners who work in the business to receive “reasonable compensation.” What counts as reasonable?

Factors the IRS considers:

• What similar positions pay in your industry
• Your experience and qualifications
• Time you devote to the business
• Comparable salaries in your geographic area
• Complexity and responsibility of your role

Rule of thumb: Your salary should be at least 40-60% of your business profits before distributions.

What happens if your salary is too low

• IRS reclassifies distributions as wages
• Back payroll taxes, plus penalties
• Interest on unpaid taxes
• Audit of other years

It’s not worth the risk. Pay yourself reasonably.

Payroll requirements

As an S-Corp, you must:

1. Pay yourself a salary — Regular paychecks, not occasional draws
2. Run payroll — Withhold and remit federal and state payroll taxes
3. File payroll tax returns — Form 941 quarterly, Form 940 annually
4. Issue W-2 — To yourself at year-end

Pluvel handles payroll for S-Corps. We calculate withholdings, file returns, and issue your W-2. You just approve the paychecks.

S-Corp vs. regular LLC

Factor	Regular LLC	S-Corp
Self-employment tax	On all profits	Only on salary
Payroll required	No	Yes
Ongoing complexity	Lower	Higher
Cost to run	Lower	Higher (payroll fees, additional filings)
Best for profits under $60k	✓	✗
Best for profits over $80k	✗	✓

How distributions work

After paying yourself a reasonable salary, remaining profits can be distributed to shareholders. These distributions:

• Are not subject to self-employment tax
• Pass through to your personal return
• Are taxed at your ordinary income rate
• Must be proportional to ownership (no picking favorites)

Example breakdown

Your S-Corp earns $150,000 in profit. You pay yourself$80,000 salary.

Item	Amount	SE Tax?
Salary	$80,000	Yes (15.3%)
Distribution	$70,000	No
Total income	$150,000	—
SE tax owed	$12,240	—

The $70,000 distribution still gets taxed as regular income, but you avoid the 15.3% self-employment tax on it.

Revoking S-Corp status

You can revoke S-Corp status if:

• Shareholders owning more than 50% consent
• You want to return to C-Corp or regular LLC taxation

Revocation takes effect on the date you specify or the first day of the next tax year.

Run payroll as an S-Corp

Learn how to pay yourself and run payroll.