An S corp is a tax election, not a separate entity type — an LLC can make it. The election requires you to run payroll and pay yourself a reasonable salary, which is the real operational change. Whether it saves you money depends on profit, and that calculation belongs to your CPA.
The question gets asked as though these are two options on a menu. They are not. An LLC is a legal entity formed with a state; an S corp is an election made with the IRS about how an entity is taxed. An LLC can make that election and remain an LLC.
What the election actually does
It changes how the profit reaches you. Without it, business profit is generally subject to self-employment tax in full. With it, you become an employee of your own business, take a salary through payroll, and the remaining profit is distributed without that employment tax.
That gap is where the saving comes from. It is also why the election is not free money — you have created a payroll obligation, and the IRS has an interest in the salary being reasonable rather than nominal.
What changes in your books
More than most owners expect. You now have wage expense, employer payroll tax expense, and withholding liabilities that have to clear each period. Owner draws split into salary, which runs through payroll, and distributions, which do not.
Practices that make the election and keep booking everything as draws end the year with a return that does not agree to the books, and a payroll filing that does not agree to either.
The costs on the other side
A payroll provider, a separate business return, and generally a higher accounting fee. Those are real and recurring, and they are the reason the election does not pay at low profit levels.
There is also an administrative floor: payroll has to run on a schedule, returns have to be filed quarterly, and none of it pauses in a slow year.
Where the decision belongs
With your CPA, using your actual profit rather than a rule of thumb. The commonly repeated profit thresholds are averages across situations that may not resemble yours, and state treatment varies enough to change the answer.
What we can tell you is what it does to your books, and what has to be in place before the first payroll run.
What it does not change
Liability protection comes from the entity and from operating it properly, not from the tax election. An LLC that elects S corp treatment has exactly the liability position it had the day before.
It also does not change your state filing obligations, your registered agent, or whether you need a separate bank account. Those follow the entity.
The state layer people forget
Several states impose their own franchise tax, minimum tax or fee on entities regardless of profit, and a few treat the S election differently from the federal treatment. That can eat a meaningful share of the saving.
This is a large part of why a rule of thumb heard from someone in another state is unreliable. The federal arithmetic is only half of it.
Timing
The election has filing deadlines relative to the tax year you want it to apply to, with relief available in some late-filing situations. Deciding in December for the year just ending is usually too late to help that year.
If it is on your mind at all, raise it with your CPA early in the year rather than at filing.
Common questions
- Is an S corp better than an LLC?
- They are not alternatives. An LLC is an entity; an S corp is a tax election an LLC or corporation can make. The question is whether the election suits your profit level.
- When does an S corp election make sense?
- Generally once profit is high enough that the payroll tax saving exceeds the cost of running payroll and filing a separate return. Your CPA runs that number on your actual figures.
- What changes in my books after the election?
- You run payroll for yourself, which adds wage expense, employer taxes and withholding liabilities. Owner draws become distributions and are tracked separately from salary.
- Do I need a separate bank account?
- You should already have one. The election does not create that requirement, but commingling is more consequential once you are operating as a corporation for tax purposes.
- Can I undo an S corp election?
- Revoking is possible but has consequences and timing rules, and re-electing afterwards is restricted. Treat it as a decision to make deliberately rather than to try out.
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