Electing S-Corp Status for single member LLC

Why should a profitable single member LLC elect S-Corporation Tax Status?

One of the core values a certified public accountant can provide is the exploration of strategies that can optimize a company’s tax position.  If you own a single member LLC that is making a profit, one of those strategies is to elect S-Corporation status and yield significant tax benefits. 

When a single member LLC elects to be taxed as an S Corporation, it changes the way it reports income and pays taxes to the IRS. Instead of the traditional LLC tax structure where all profits are subject to self-employment taxes, S Corporation status allows business owners to split income into salary and distributions, potentially reducing self-employment taxes.

Here are some key tax benefits of electing S Corporation status:

1.    Self-Employment Tax Savings: One of the primary advantages is the potential for substantial self-employment tax savings. By taking a reasonable salary as an employee of the S Corporation and distributing the remaining profits as dividends, business owners can avoid paying self-employment taxes (Social Security and Medicare taxes) on the distribution portion of income.

2.    Pass-Through Taxation: Like an LLC, an S Corporation is a pass-through entity, meaning business profits and losses flow through to the owners' personal tax returns. This can potentially reduce the overall tax burden compared to the standard corporate tax structure.

3.    Flexibility in Income Distribution: S Corporation status allows for flexibility in distributing income. As owner you must take a reasonable salary per IRS rules, but you can receive additional profits as distributions, which are not subject to self-employment taxes.

4.    Tax Deductions and Benefits: With S-Corporation tax status, your business can take advantage of additional tax deductions and benefits, such as health insurance premiums, retirement plan contributions, and certain fringe benefits, which can further reduce taxable income.

Electing S-Corp status and filing an S-Corporation tax return does require a little more paperwork, but it can be well worth it in the tax savings that are achieved.

This article is specific to single member LLCs.   Multi-member LLCs have a few more things to consider.  There is an October 2022 article from the Tax Adviser that touches upon ​reasons why some LLCs should not elect to be S Corporations.  Do your research and then talk to a tax professional about what is best for you and your business.