LLC with an S Corporation Election

A limited liability company can elect to be taxed as an S Corporation by filing Form 2553 with the IRS, allowing the owner to potentially reduce self-employment taxes without giving up the simpler management structure of the LLC. By default, a single member LLC is taxed as a sole proprietorship and a multi-member LLC is taxed as a partnership, meaning all net profit is subject to self-employment taxes at a combined rate of 15.3% on the first $176,100 and 2.9% above that threshold. After making the election, the LLC owner must pay themselves a reasonable W-2 salary, but only the salary is subject to payroll taxes while the remaining profits can be distributed without those taxes. The LLC structure still controls how the business is legally organized and operated, but the IRS treats it as an S Corporation for federal income tax purposes. This strategy tends to make sense when the business earns more than roughly $40,000 in annual net profit, because the tax savings need to outweigh the added cost of payroll administration and more complex tax filings.