An S corporation election is a formal request made to the IRS by an eligible small business to change how it is taxed. By making this election, a business ensures its profits pass directly through to the owners’ personal tax returns, completely avoiding corporate-level double taxation. It also unlocks a unique tax structure that can help active business owners legally reduce their self-employment tax burden.

Meaning of “S corporation election”

In plain English, an S corporation election is you raising your hand and telling the IRS, “Please don’t tax my business under the default rules.”

When you start an LLC, the IRS automatically taxes you as a sole proprietor (if you are the only owner) or a partnership (if there are multiple owners). If you form a standard corporation, you are taxed as a C corporation. An S corporation election is a special override. You are asking the IRS to treat your business under Subchapter S of the tax code, which blends the pass-through simplicity of an LLC with the tax benefits of a corporation.

Why an “S corporation election” Matters

Taxpayers care about this election because it is one of the most effective ways for profitable small businesses to save money on taxes.

Normally, if you run an LLC, you pay a heavy self-employment tax (which funds Medicare and Social Security) on every single dollar of your net profit. However, once your S corporation election is approved, you can split your profits into two buckets: a W-2 salary and a shareholder distribution. You only pay self-employment tax on the W-2 salary portion. The remaining profit taken as a distribution is exempt from that specific tax, which can result in thousands of dollars in savings.

How an “S corporation election” Works

To make the election, your business must meet strict IRS criteria: it must be a domestic business, have 100 or fewer allowable shareholders (who must be U.S. citizens or residents), and have only one class of stock.

If you meet the rules, you fill out a specific IRS form and submit it by a strict deadline—usually within the first two and a half months of the tax year in which you want the election to take effect. Once approved, the business itself does not pay federal income tax. Instead, the business files an annual informational return and issues a Schedule K-1 to each owner, showing their share of the profits to report on their personal tax return.

Simple Example of an “S corporation election”

Let’s say you run a successful graphic design LLC, and your net profit for the year is $90,000. Under the default LLC tax rules, you must pay a 15.3% self-employment tax on that entire $90,000 (which is over $13,700), on top of your regular income taxes.

If you successfully file an S corporation election, the math changes. You decide that a “reasonable salary” for the work you do is $50,000. You put yourself on the company payroll and pay the 15.3% tax only on that $50,000 salary (about $7,650). The remaining $40,000 is passed to you as a shareholder distribution. Because distributions avoid self-employment tax, your S corporation election just saved you over $6,000 in taxes for the year.

Who Is Affected by an “S corporation election”?

LLC Owners and Freelancers: High-earning self-employed individuals who want to lower their self-employment tax bills.
Small Business Owners: Entrepreneurs who have steady, predictable business income that exceeds what they would need to pay themselves as a standard salary.
C Corporation Shareholders: Owners of standard corporations who want to stop paying corporate-level taxes and switch to a pass-through tax model.

Common Mistakes Related to an “S corporation election”

Missing the deadline: The IRS is strict. The election must generally be filed by March 15th (or the 15th day of the third month of your tax year). If you miss it, you might have to wait until the next year, though the IRS does offer late-election relief in certain cases.
Forgetting to run payroll: Once the election is active, you are legally required to treat yourself as an employee and run formal W-2 payroll. Many business owners forget this crucial step.
Paying an unreasonably low salary: Trying to pay yourself a $10,000 salary while taking $100,000 in distributions to dodge taxes is a massive red flag that triggers IRS audits.
Having ineligible owners: Bringing on a foreign investor or another corporation as a partner, which instantly invalidates the election.

Forms Related to an “S corporation election”

Form 2553 (Election by a Small Business Corporation): This is the golden ticket. It is the actual form you must sign and fax or mail to the IRS to request S corp status.
Form 1120-S: The annual tax return your business must file once the election is approved.
Schedule K-1 (Form 1120-S): The document the business generates for each owner at tax time to report their share of the income.

“S corporation election” vs. Related Terms

S Corporation Election vs. LLC Formation: Forming an LLC is a legal step done at the state level to protect your personal assets. An S corporation election is a purely financial step done at the federal level to change how the IRS taxes that LLC.
S Corporation Election vs. C Corporation Election: A C corp election (often default for incorporated businesses) means the business pays its own taxes at the corporate rate. An S corp election bypasses the corporate tax rate and passes profits to the owners’ personal returns.

Related Glossary Terms

FAQs About an “S corporation election”

Can an LLC make an S corporation election?
Yes! In fact, most modern S corporations are legally set up as LLCs. The LLC simply files Form 2553 with the IRS to ask to be taxed as an S corp.

When is the deadline to file the election?
You generally have two months and 15 days from the beginning of your tax year to file Form 2553 for it to take effect that year. Always verify the exact deadline dates for the current tax year, as weekends and holidays can shift the exact day.

What happens if I miss the filing deadline?
If you miss the deadline, your election will usually go into effect the following tax year. However, the IRS does provide a procedure for “late election relief” if you had a reasonable cause for filing late.

Can I undo an S corporation election?
Yes. If you decide the S corp structure is no longer working for you, you can file a formal revocation with the IRS to switch back to a C corporation, or dissolve the entity. However, there are waiting periods before you can elect S corp status again.

Final Takeaway

An S corporation election is a powerful tax-planning maneuver that allows profitable small businesses to bypass corporate double taxation and save heavily on self-employment taxes. While filing Form 2553 is the key to unlocking these benefits, the election also brings strict rules, mandatory payroll setups, and extra tax return filings. It is vital to ensure your business makes enough profit to justify the added administrative effort before making the switch.

Disclaimer: This article is for general educational purposes only and should not be considered tax, legal, or financial advice. Tax rules, rates, limits, deadlines, and thresholds can change, and you should verify them for the current tax year. Your situation may be different. Consider consulting a qualified tax professional before making tax decisions.

What Is an “S corporation election”?