Start an S-Corp — Reduce Self-Employment Taxes & Protect Your Assets
An S-Corporation lets profitable business owners split income between salary and distributions — potentially saving $3,000–$15,000+ per year in self-employment taxes. BusinessFormations.com handles your formation and S-Corp election from start to finish.
What Is an S-Corporation?
An S-Corporation is not a separate entity type — it’s a tax classification that you elect with the IRS by filing Form 2553. You first form an LLC or corporation with your state, then elect S-Corp tax treatment.
The key advantage: as an S-Corp, you pay yourself a reasonable salary (subject to payroll taxes), and then take remaining profits as distributions — which are not subject to the 15.3% self-employment tax. This split is where the savings come from.
For example, if your business earns $120,000 in profit and you pay yourself a $60,000 salary, only the $60,000 salary is subject to self-employment tax. The remaining $60,000 comes to you as a distribution, saving you roughly $9,180 in SE taxes.
S-Corps maintain pass-through taxation — the business itself doesn’t pay federal income tax. Instead, profits and losses pass through to your personal tax return, just like an LLC or sole proprietorship.
S-Corp at a Glance
- Tax election, not a separate entity type
- Pass-through taxation (no double tax)
- Split income: salary + distributions
- Distributions avoid 15.3% SE tax
- Requires reasonable salary to owner(s)
- ≤100 shareholders, all U.S. residents
- One class of stock only
How S-Corp Tax Savings Actually Work
The math behind the S-Corp advantage — and when it makes a real difference.
Without S-Corp Election
Standard LLC / Sole Proprietorship
* 15.3% = 12.4% Social Security + 2.9% Medicare on first $168,600 (2024). Actual calculation uses 92.35% of net earnings.
With S-Corp Election
Same business, S-Corp tax treatment
Important: The “reasonable salary” must reflect what you’d earn doing the same work for someone else. The IRS scrutinizes S-Corp owners who set unreasonably low salaries. A CPA can help determine the right number for your role and industry.
When Does an S-Corp Make Sense?
The S-Corp isn’t right for everyone. Here’s how to know if the math works in your favor.
S-Corp Makes Sense When…
- ✓Net profit consistently exceeds $60,000/year
- ✓You’re the primary operator of the business
- ✓You can justify a reasonable salary
- ✓You’re comfortable running payroll
- ✓Tax savings exceed the added compliance costs
- ✓Your CPA confirms the math works
S-Corp May Not Be Worth It When…
- •Net profit is under $50,000/year
- •Income fluctuates significantly year to year
- •You have significant business losses to pass through
- •Payroll costs would eat up the tax savings
- •You’re a single-member LLC with simple finances
S-Corp Doesn’t Work When…
- ✗You have more than 100 shareholders
- ✗Any shareholder is not a U.S. resident
- ✗You need multiple classes of stock
- ✗You’re raising venture capital
- ✗A corporation or partnership is a shareholder
Rule of thumb: If your business nets $60,000+ per year consistently and you can justify a reasonable salary, the S-Corp election likely saves you money. Below that threshold, the added payroll and accounting costs may offset the tax savings.
How to Form an S-Corp — Step by Step
An S-Corp requires two steps: form your entity with the state, then elect S-Corp status with the IRS.
Form Your Entity
First, form an LLC or corporation with your state. Most S-Corp owners start with an LLC.
Choose LLC or Corporation
You can elect S-Corp tax status on either an LLC or a corporation. Most small business owners choose LLC + S-Corp election because the LLC is simpler to manage while still getting the S-Corp tax benefits. Corporations with S-Corp election are better suited for businesses that may later need a C-Corp structure.
File Formation Documents
We file your Articles of Organization (LLC) or Articles of Incorporation (corporation) with your state, designate your registered agent, and prepare your Operating agreement or bylaws.
Obtain Your EIN
Your EIN is required before you can file Form 2553 with the IRS. We obtain your EIN same-day so there’s no delay in the S-Corp election process.
Elect S-Corp Tax Status
Once your entity is formed and you have an EIN, file the S-Corp election with the IRS.
File IRS Form 2553
Form 2553 is the S-Corp election form. All shareholders must sign it. The form must be filed within 75 days of formation (for new entities) or by March 15 to take effect for the current tax year. We prepare and file this form as part of our Venture package.
Set Up Payroll
Once your S-Corp election is active, you must run payroll and pay yourself a reasonable salary. This requires setting up a payroll system, withholding federal and state taxes, and filing quarterly payroll tax returns (Form 941).
Take Remaining Profits as Distributions
After paying yourself a reasonable salary, remaining profits can be taken as shareholder distributions. These distributions are subject to income tax but not self-employment tax — this is where the savings happen.
File Annual Tax Return (Form 1120-S)
S-Corps file an annual informational return (Form 1120-S) and issue K-1 forms to each shareholder showing their share of income, deductions, and credits. The business itself doesn’t pay federal income tax — it all passes through to shareholders.
IRS Form 2553 — S-Corp Election Details
The critical filing that activates your S-Corp tax status. Here’s what you need to know.
📅 Filing Deadline
New entities: Within 75 days of your formation date or the beginning of the tax year for which you want the election to take effect.
Existing entities: By March 15 of the year you want the election to start. If filed after March 15, the election takes effect the following year.
Late elections: The IRS has a reasonable cause provision for late filings. We can help you file a late election with a reasonable cause statement if you’ve missed the deadline.
📝 Eligibility Requirements
- Domestic entity (formed in the U.S.)
- 100 or fewer shareholders
- All shareholders must be U.S. citizens or residents
- Shareholders can only be individuals, estates, or certain trusts
- Only one class of stock (though voting rights can differ)
- Cannot be a bank, insurance company, or DISC
✍️ What’s Required to File
- Company name, EIN, and formation date
- Tax year election (calendar or fiscal year)
- Signature of all shareholders on the form
- Date the election should take effect
- State of incorporation/organi