Looking for S corp tax strategies? See if an LLC switch pays on your profit.

When your LLC is taxed the default way, all of its profit is subject to self-employment tax. That's 15.3% for Social Security and Medicare, figured on 92.35% of your net earnings. When the LLC elects S corp status, you become an employee of your own company. Social Security and Medicare tax then applies to the salary you're paid through payroll. The profit left after that salary passes through to you on a K-1. You pay income tax on it, but no Social Security or Medicare tax.

Here's an example with round numbers. The owner is made up, and your numbers will differ.

• The business earns $110,000 of profit before the owner takes any pay.
• In an LLC taxed the default way, self-employment tax applies to 92.35% of that profit, or $101,585. At 15.3%, that comes to about $15,540.
• In the same business as an S corp, the owner is paid $50,000 through payroll. Payroll tax for Social Security and Medicare is 15.3% of $50,000, or $7,650, split between the company and the owner's paycheck.
• Payroll tax saved before costs: roughly $7,890 for the year.

After the salary and the company's half of the payroll tax, about $56,200 of profit is left in the company. It shows up on your K-1, you pay income tax on it the same way you did before, and you can take it out as distributions.

Then subtract what an S corp costs to run. You'll pay a payroll provider, file a second tax return (Form 1120-S), and pay federal and state unemployment tax on your own wage. Income tax shifts a little too. You lose the deduction for half of self-employment tax, the company deducts its share of payroll tax, and the qualified business income deduction is figured on the smaller profit. On the call, we run all of that with your real numbers and show you the result. More worked examples are on the savings page.

The switch usually pays when your profit is steady and clearly more than a fair salary for the work you do. In the example above, $60,000 of profit sat on top of the salary, and that's where the saving came from.

It often doesn't pay yet when profit is small. Say profit is $40,000 and a fair salary for the work is $30,000. Self-employment tax would be about $5,650. Payroll tax on the salary would be $4,590. The gap is about $1,060 a year, and payroll fees plus a second return can use up most of it.

A few other things change the answer:

• Other wages. If you also earn a paycheck at a job, those wages count toward the yearly Social Security limit ($184,500 for 2026). That can shrink the saving.
• Your state. Some states charge S corps their own tax or fee, and that goes on the cost side.
• How owners split the money. An S corp has one class of stock, so distributions follow ownership. If partners want to split profit some other way, an LLC taxed as a partnership may fit better.
• Property. Taking real estate or other property out of an S corp can be taxed as if it were sold at today's value. Property you plan to hold for years often fits better outside the S corp.

If the switch doesn't pay this year, we tell you, along with the profit level that would make it worth another look.

You form an LLC by filing with your state. An S corp is a tax status you choose with the IRS. So the real question is usually whether your LLC should stay taxed the default way or be taxed as an S corp. Your LLC keeps its name, its state filings and its liability protection either way. The election changes how the profit is taxed and how you pay yourself.

A corporation can make the same election. The owner rules are the same for both: no more than 100 shareholders, one class of stock, and only certain kinds of owners, such as individuals and some trusts and estates. A partnership, another corporation or a nonresident alien can't be an S corp shareholder.

Once you elect, the IRS expects every owner who works in the business to take a reasonable salary through payroll before taking distributions. Think of it as the pay you'd offer a hired manager to do the work you do.

The IRS lists the factors that matter, including your training and experience, your duties, the time you put in, what the business pays employees who aren't owners, how bonuses are paid, and what similar businesses pay for the same work. No set percent of profit applies to everyone. We write a short memo for your file that shows the work you do and how we got to the number.

Two owners who do different work can have different salaries. An owner who doesn't work in the business may not need a salary at all. The salary and payroll page has the full steps.

1. Pick a payroll provider. We help you choose one that fits a small company.
2. Open the state accounts. Most states need a withholding account and an unemployment tax account.
3. Set the salary and the pay schedule. Monthly or twice a month works for most owners.
4. Run payday. Most providers withhold the tax, make the deposits, and file Form 941 each quarter, Form 940 each year, and your W-2 by January 31.
5. Record it in the books. Wages go to a wage account, kept apart from distributions.

We set payroll up with you. You run each payday with the provider you pick, and we check that the books match what payroll reported.

If people who work for you are paid as contractors and the work looks like employment, that's a separate question from your own salary. We flag it when we see it, so the two don't get mixed up.

To elect, file Form 2553 with the IRS. The deadline is 2 months and 15 days after your chosen tax year begins, and you can also file any time in the year before. So if your company runs on the calendar year and you want S corp treatment from January 1, March 15 is your last day.

A company officer signs Form 2553, and each shareholder adds a signed consent. Missed the deadline? Many small businesses can still get the election accepted through late-election relief. The request is generally due within 3 years and 75 days after the start date you wanted, along with a short note on why it's late.

The IRS sends a letter when it accepts the election. Keep it with your company records. The Form 2553 page walks through each step.

Your bank balance can be right while the owner accounts are mixed up. The S corp return reports money you put in, money you took out, and profit left in the company on separate lines, so the books need a separate account for each.

Money you put in raises your basis. Distributions are tested against basis, and they're generally tax-free up to it. Profit that stays in the company is tracked as a third, separate amount. When one owner-draw account does all three jobs, your K-1 can come out wrong even when the total looks fine.

When we set up the books, we split those accounts and clear any leftover opening balance to zero. Then we close each month. The books match the bank, each receipt has an account, unpaid bills are listed, and wages sit in the wage account. Form 1120-S is then prepared from those closed months.

Picture a small shop owner who elected S corp. Every Friday, cash moves to a personal account, marked as a distribution. Payroll never started, so there's no salary on the books.

Here's how we'd fix it. Start payroll now, with a salary that fits the work. Label each Friday transfer correctly while the year is still open. If the year is close to over, a catch-up paycheck before December 31 can bring the salary for the year up to a reasonable level. For years that already closed, we look at the options with you and pick the one that fits the facts.

With a salary on payroll and a closed month behind each return, the records line up. If the IRS ever asks, you have the payroll reports, the salary memo and the books to show.

If two people own the shop and only one works there, only the working owner needs a salary. The other owner's money can come out as distributions, in line with what each one owns. The owner draws page has more.

An open year gives you choices. A salary can start. A retirement contribution based on your W-2 wages can be sized once the salary exists. We can compare how the salary affects your qualified business income deduction before you file, using your own income.

Once a year is closed, there are fewer options. Some files need an amended return. Some need late-election relief. If the books have been behind for a while, say so on the form, and we'll plan the cleanup with you.

We work on a video call with the books shared on the screen. You keep your payroll login and your records. You can close each month on a date that already works for you, wherever you are.

At my level of profit, does an S corp pay off? It depends on your profit, the salary your work supports, and your other income. In the example above, $110,000 of profit with a $50,000 salary saved about $7,890 in payroll tax before costs. Book the free 30-minute call, and we'll work it out with your own figures.

Can I pay myself a very low salary to save more? The salary has to fit the work you do. If the IRS finds it too low, it can treat part of your distributions as wages and charge back payroll tax, interest and penalties. We help you pick a salary that matches your duties and hours, and we write down why.

Can I switch in the middle of the year? An election usually starts on the first day of a tax year. A form that's late, without relief, generally counts for the following tax year instead. We check which one fits your dates.

Do I need to form a new company? Usually not. Your existing LLC files Form 2553 to be taxed as an S corp, and it keeps its name and its state registration.