Overview
S Corps aren’t actually a type of business structure – they’re a tax election that can be added to certain legal entities (like an LLC, PLLC or stock corporation). By electing S Corp tax status, you change how your business income is taxed without changing your underlying entity type.
Many solopreneurs make this election because it may help save on self-employment taxes. As an S Corp owner, you pay yourself a reasonable salary through payroll (subject to payroll taxes) and take the remaining profits as owner distributions (not subject to self-employment tax).
While S Corp status can bring potential savings, it also comes with added responsibilities. At Collective, we support S Corp members through our S Corp Tier (our original product), which includes help with business set up, monthly bookkeeping, payroll and annual S Corp tax filing.
If you’ve elected S Corp status or are exploring whether it makes sense for you, here’s what to know about being an S Corp at Collective.
Benefits of an S Corp
While S Corp status can be added to different entity types, Collective’s S Corp Tier currently supports single-member LLCs (SMLLCs) and Professional LLCs (PLLCs) that have elected or want to elect S Corp status.
Here’s what changes when you elect S Corp status:
- You remain an LLC legally, but your business taxes are filed differently. You’ll keep your same legal business name, EIN, and business bank accounts.
- You’re required to pay yourself a reasonable salary as an employee of your business — meaning receipt of a formal wage processed through a payroll processor.
- As an S Corp, only the wages you pay yourself through payroll are subject to self-employment taxes — your remaining profit is not. (As an SMLLC that has not elected S Corp status, your entire business profit is subject to self-employment tax)
This shift can have a significant impact. As an SMLLC, you pay self-employment tax (Social Security and Medicare) on your entire business profit. But as an S Corp, you only pay those taxes on a smaller portion: your salary. The remaining profit isn’t subject to self-employment tax, which is where the potential savings come from. You’ll still pay regular income tax on all of your business income, but the S Corp election changes how much is exposed to the additional payroll or self-employment taxes.
How Do I Get Paid With an S Corp Election?
Electing S Corp status changes not only how your taxes are calculated, but also how you pay yourself. Because you’re both the owner and an employee of your business, you’ll receive compensation in two ways — through payroll (your salary) and through owner distributions. Understanding the difference between the two is key to keeping your books and taxes accurate.
- Salary (W-2 wages): You pay yourself a reasonable salary through payroll, which is subject to both income tax and self-employment taxes
- Distributions: After paying yourself a salary, you can take additional profits as owner distributions, which aren’t subject to self-employment tax
Under an S Corp election, your cash flow is still the same, you just receive your compensation in two buckets: salary and owner distribution. Click here for more IRS guidance on reasonable compensation.
When an S Corp Makes Sense
Many solopreneurs choose to elect S Corp status once they feel ready for the added structure and reporting that come with it. Beyond potential tax savings, it can also help you build a stronger financial foundation for your business.
Many solopreneurs choose to elect S Corp status when:
- The potential tax savings outweigh the added cost and admin work (like payroll and a separate business return)
- They want to earn W-2 income, which can help demonstrate steady earnings for things like a mortgage or loan applications
- They want formal bookkeeping and financial statements to show growth
- They plan to apply for grants or SBA loans, which often require a separate business tax return, financial statements and payroll records
If I Elect S Corp, Can I Switch Back to an LLC?
Once you’ve elected to be taxed as an S Corp, reverting back to single-member LLC (Schedule C) treatment isn’t automatic — and it can get complicated. Revoking an S Corp election requires multiple formal steps and filings, including:
- Submitting a formal revocation of your S Corp election to the IRS
- Making a new election for disregarded (single-member LLC) tax treatment — it doesn’t happen automatically
- Understanding that if no new election is made, your business defaults to C Corp taxation (i.e. a 21% federal corporate tax rate)
- Managing potential mid-year complications, like filing final and partial-year S Corp returns
- Separating bookkeeping and income reporting between your S Corp period and post-revocation LLC activity
In addition, once an S Corp election is revoked, the IRS generally won’t allow you to re-elect S Corp status for five years without special permission. These steps can be time-consuming and create additional filing and bookkeeping complexity. At this time, Collective cannot support the changes required when an S Corp election is revoked.
Closing
Electing S Corp status comes with additional administrative responsibilities and costs. You’ll need to maintain accurate bookkeeping, manage payroll and file a separate annual business tax return. Staying current with these requirements is essential. That’s why Collective exists — to help simplify and manage the ongoing back-office duties that comes with being a solopreneur.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.