Single-Member LLC Taxed as S Corp: Pros, Cons & How To

For many small business owners, forming a single-member limited liability company (LLC) is the simplest way to obtain liability protection without being overwhelmed by paperwork. But as profits grow, so do self-employment taxes. That’s when many entrepreneurs start asking:

Can my single-member LLC be taxed as an S corporation, and should it be?

The answer is yes, but with important caveats. Electing S corporation tax status can unlock meaningful savings and signal a new stage of professionalism in your business. It also introduces stricter compliance requirements, payroll responsibilities, and a key challenge: determining a “reasonable salary.”

This guide explains how the election process works, when it is applicable, and what factors to consider before filing.

Key Highlights

• By default, single-member LLCs are taxed as sole proprietorships, with all profits subject to self-employment tax.

• An S corporation election lets you split profits between a salary (taxed at payroll rates) and distributions (not subject to self-employment tax).

• The IRS requires owner-employees to take “reasonable compensation,” making this the most scrutinized aspect of S corp taxation.

• S corps bring extra responsibilities, including payroll, quarterly filings, and corporate tax returns.

• The election is generally most beneficial when business profits begin exceeding $50,000 to $80,000 annually.

• State tax rules and 2025 federal tax law changes, including updates to the Qualified Business Income (QBI) deduction and increases in the SALT cap, can impact the outcome.

• Professional guidance is strongly recommended to strike a balance between savings, compliance, and long-term business strategy.

How Is a Single-Member LLC Normally Taxed?

By default, the IRS treats a single-member LLC as a “disregarded entity” for tax purposes. In practice, that means your business income is reported directly on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) of your personal IRS Form 1040, U.S. Individual Income Tax Return.

The simplicity is appealing: no separate corporate tax return, no payroll requirements, and straightforward bookkeeping. But the downside is costly:

• All net profits are subject to income tax and the full 15.3% self-employment tax (Social Security and Medicare).

• As profits grow, so does your tax bill, which can make it difficult to reinvest in your business.

For many entrepreneurs, these issues spark interest in the S corporation election.

The S Corp Election: A Strategic Tax Classification

Electing S corp status does not change your LLC’s legal structure—it only changes how it’s taxed. It will remain a pass-through entity. This should not be confused with an entity classification election for a C corporation, which features double taxation.

Self-Employment Taxes and S Corp Election

The primary appeal of an S corp tax election is the ability to divide income into:

• Salary (reasonable compensation): Subject to payroll taxes (Social Security and Medicare).

• Distributions: Not subject to self-employment tax.

S Corp Example:

If your LLC earns $150,000 in profit:

• As a sole proprietor, you’d owe self-employment tax on the full $150,000.

• As an S corporation, you may pay yourself a $75,000 salary (payroll taxes apply) and take the remaining $75,000 as a distribution, saving thousands in taxes.

Eligibility for S Corp Election

The IRS requires that an S corporation meet and maintain these eligibility requirements:

• Is a domestic business entity.

• Has only eligible shareholders (no partnerships, corporations, or non-resident aliens).

• Has 100 or fewer shareholders.

• Issues only one class of stock.

How to Make the Election

To transition from a single-member LLC to an S corp, prepare and file Form 2553, Election by a Small Business Corporation.

• Deadline: within 2 months and 15 days of the start of the tax year you want the election to apply—March 15 for calendar year filers. 

• If you miss the deadline, late election relief may be available.

At this stage, many business owners turn to professional services and entity formation support from 1-800Accountant to ensure the election is filed correctly and on time.

Determining “Reasonable Compensation”

The successful implementation of the S corp strategy hinges on one key requirement: paying yourself a reasonable salary.

How to Define “Reasonable”

The IRS defines reasonable compensation as the amount that similar businesses would pay for comparable services. Key factors include:

• The nature of your duties.

• Your experience and skill set.

• Time spent working in the business.

• Compensation paid to non-owner employees.

Some entrepreneurs follow a 60/40 rule (60% salary, 40% distributions), but this is not official guidance. Typically, it’s better to rely on industry-specific benchmarks.

The Importance of a Defensible Strategy

Underreporting salary is one of the top audit triggers for S corps. Documentation, research, and professional guidance are essential in making this determination while avoiding IRS scrutiny.

Affordable, tax-deductible tax advisory from 1-800Accountant provides the compliance support necessary to justify your compensation strategy and avoid penalties.

The Trade-Off: Increased Administrative and Compliance Burdens

While the tax savings can be substantial, they also come with additional responsibilities.

The Requirement of a Formal Payroll

Once you elect S corp status, you become an employee of your business. This means:

• Running payroll and withholding federal and state taxes.

• Filing quarterly IRS Form 941, Employer's Quarterly Federal Tax Return, and annual IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.

• Making timely payroll tax deposits.

This can be overwhelming for solo entrepreneurs, but integrated solutions, such as full-service payroll from 1-800Accountant, handle these tasks for you, minimizing headaches.

New Tax Filing Requirements

Instead of filing Schedule C, you’ll now file IRS Form 1120-S, U.S. Income Tax Return for an S Corporation, and issue a Schedule K-1 to yourself as the shareholder.

This is more complex and typically requires professional tax preparation support.

Considering the Costs

The additional costs of transition to an S corp include: 

• Payroll software or service fees

• Higher accounting costs

• Potentially higher administrative expenses

These costs must be weighed against projected tax savings to determine if the election makes sense. 

Is the S Corp Election Right for Your Single-Member LLC?

The income threshold when it makes financial sense

Most tax professionals agree that the election begins to pay off when the net income exceeds $50,000 to $80,000 annually. Below that level, the added costs may outweigh savings.

A personalized analysis, such as a tax savings calculator or a consultation, will help determine the specific break-even point for your business.

State Tax Implications

Not all states recognize the federal S corp election. Some states impose additional state-level taxes on S corporations, so it’s crucial to review your state’s rules before filing.

Professional tax advice with state-specific knowledge is critical in this scenario. 

Impact of 2025 Tax Law Changes

The One Big Beautiful Bill Act of 2025 made significant changes that affect S corps:

• The 20% QBI deduction was permanently extended.

• The SALT deduction cap increased to $40,000 for many taxpayers.

These changes may make the S corp election more favorable for certain businesses in high-tax states.

Make a Confident Decision About Your Business Structure with 1-800Accountant’s Experts

It's evident from this article that choosing S corp taxation is more than a tax decision—it’s a strategic step that can position your business for long-term growth. But it comes with complexity that most entrepreneurs shouldn’t navigate alone.

This challenge requires an integrated approach that handles business formation advice, tax strategy, bookkeeping, and payroll in a cohesive manner. When you trust 1-800Accountant with this complex work, we simplify the entire process on your behalf. 

We will provide essential support to your S corp with:

• Entity formation services to ensure your election is filed correctly.

• Full-service payroll to simplify compliance.

• Year-round tax advisory for guidance on tax benefits, reasonable compensation, tax forms, and audit readiness.

With our dedicated team of CPAs, EAs, bookkeepers, and tax professionals, you can focus on running your business while we handle the financial complexities.

Don't wait – schedule a free 30-minute consultation to determine if S corporation status is the right move for you.

S Corp Election FAQs for Single-Member LLCs

What are the different payroll taxes S corporations have to pay?
S corps must withhold and remit federal income tax, Social Security, and Medicare on employee wages, including the owner’s salary. Owners address taxes on their personal income tax returns.

Does electing S corp status affect legal liability protections for a single-member LLC?
No. Your LLC’s personal liability protection remains the same—only your tax classification changes once you've successfully transitioned to an S corp.

Can I pay myself only distributions if I’m the sole owner of an S corp LLC?
Only taking distributions or a very low salary is not advisable. The IRS requires owner-employees to take reasonable compensation as salary before taking distributions. Failing to do so will undermine compliance and may trigger interest from the IRS. 

What taxes need to be paid on distributions?
Distributions are subject to income tax but not self-employment tax, which is where S corp owners can experience substantial tax savings. 

What happens if the IRS rejects the S corp election for a single-member LLC?
If Form 2553 is incomplete, late, or your LLC fails to meet eligibility requirements, the election can be denied. Professional assistance can help mitigate this risk before you attempt an S corporation election.

Can a single-member LLC taxed as an S corp take the QBI deduction?
Yes, qualified income from an S corp may be eligible for the 20% deduction.

Can a single-member LLC taxed as an S corp still deduct business expenses?
Yes, ordinary and necessary business expenses remain deductible.

Can I switch back to default LLC taxation after electing S corp status?
Yes, but switching too frequently may raise IRS concerns. It’s best to make the election with a long-term plan in mind.