An LLC is a legal entity. An S corporation is a tax status.
A single-member LLC is taxed like a sole proprietorship by default. That same LLC can file Form 2553 to be taxed as an S corporation while remaining an LLC under state law. So the decision is really: keep default treatment, or elect S status?
Side by side
| Single-member LLC (default) | LLC taxed as an S corporation | |
|---|---|---|
| Self-employment / payroll tax | On all net profit | Only on the owner's salary |
| Owner pay | Draws, no payroll needed | Reasonable salary through payroll, plus distributions |
| Federal return | Schedule C on your Form 1040 | Form 1120-S plus a K-1 |
| Extra costs | Minimal | Payroll processing, separate return, state minimums |
| Ownership rules | Flexible | Up to 100 shareholders, generally U.S. individuals; one class of stock |
When S status tends to make sense
When your profit is comfortably above a reasonable salary for the work you do, so the payroll tax saved on the difference outweighs the added cost. Below that level, the extra payroll, the separate return and state fees can eat the savings.
Factors people forget
- The QBI deduction. Your salary isn't QBI, so a higher salary can reduce it, though for higher earners the W-2 wages you pay can also increase it.
- State rules. New Jersey generally recognizes federal S corporations automatically, but imposes a minimum tax. New York requires its own S election (Form CT-6), and New York City doesn't recognize S status at all.
- Pass-through entity taxes. NJ BAIT and NY PTET elections can add federal savings for S corporation owners.
How to set up S corporation taxation
- Form the LLC or corporation and get an EIN.
- File Form 2553 by the 15th day of the third month of the tax year it should apply to (March 15 for a calendar-year business), with every shareholder's consent.
- File the New York S election (CT-6) if you do business in New York.
- Set up payroll and decide on a reasonable salary.
- Keep separate books and file Form 1120-S by March 15 each year.
Frequently asked questions
Is an S corporation better than an LLC?
Neither is better in general. An LLC that elects S status keeps its legal structure and changes how it's taxed. The election usually helps once profit is well above a reasonable salary for your role.
How do I convert my LLC to an S corporation?
You generally don't convert the entity; you file Form 2553 to have the LLC taxed as an S corporation, then set up payroll and file Form 1120-S going forward.
How much salary do I have to pay myself?
A reasonable amount for the services you provide, based on factors like your role, hours and what comparable businesses pay. Too low invites IRS scrutiny.
Does New Jersey recognize my federal S election?
Generally yes, automatically, unless shareholders opt out. New York requires a separate state election.