Carrillo Sipes Tibbels, PLLC

Oct 26, 2026

Should Your LLC Elect S Corporation Status?

I have recently seen a lot of posts on Facebook regarding S Corporation elections, especially concerning LLCs.

If you own an LLC, work in the business, and earn steady profits, electing S corporation status (often called a "Sub S" election) may lower your self-employment taxes by thousands of dollars a year.

By default, an LLC is taxed as a pass-through, and the owners generally pay self-employment tax of 15.3% on net profit, up to the annual Social Security wage base. That tax applies whether you take the money out of the company or leave it in. The S corporation election changes how part of that income is taxed, without changing how your company is organized or run.

This post explains how the election works, where the savings come from, the rule that keeps it honest, and the situations where it may not be worth the added paperwork. It is written for owners of small and midsize LLCs in Wise County and across North Texas.

What the election is, and what it is not:

An S corporation election changes how the IRS taxes your LLC, not what your LLC is. Under Texas law you remain a limited liability company, with the same liability protection and an operating agreement that still governs your relationships as owners. You make the choice by filing IRS Form 2553, the form an eligible entity uses to elect S corporation status.

The election is a one-time filing. It stays in effect until it is revoked or terminated, so there is nothing to renew each year.

Under default taxation, an LLC's profits flow to the owners' personal returns and are subject to both income tax and self-employment tax. With an S election, profits still flow through and are taxed once at the owner level, which avoids the double taxation of a regular C corporation. The change is in how owners who work in the business are paid: they become employees of the company, and their income is divided between wages and distributions.

The main benefit: payroll tax savings:

The central advantage is that only the salary you pay yourself is subject to Social Security and Medicare tax. The rest of your profit can be taken as a distribution, which is still subject to income tax but not to payroll or self-employment tax.

Here is a simple illustration for an owner who actively runs a business that nets $120,000 a year and pays herself a $60,000 salary.

Default LLC taxation:
Net profit: $120,000
Salary subject to payroll tax: All $120,000 of profit is subject to self-employment tax
Distributions not subject to payroll or self-employment tax: $0
Approximate Social Security and Medicare tax: $16,956

S Election taxation:
Net profit: $120,000
Salary subject to payroll tax: $60,000
Distributions not subject to payroll or self-employment tax: $60,000
Approximate Social Security and Medicare tax: $9,180.00

Approximate difference About $7,800 less per year

These figures are for illustration only.

They are federal, assume the owner is the only employee, and leave out the income tax effect of deducting part of these taxes, unemployment taxes, and the added cost of payroll and an extra tax return. Your own numbers will differ, and a CPA should run them before you decide.
Because Texas has no state personal income tax, the federal payroll tax savings are often the main tax lever for Texas owners.

Reasonable compensation: the rule that makes or breaks the strategy:

An owner who works in an S corporation must be paid reasonable compensation for that work before taking distributions. If the salary is set too low, the IRS can recharacterize distributions as wages and assess the payroll taxes that should have been paid.

There is no fixed percentage or safe harbor. The usual questions are what the owner actually does and what the business would have to pay someone else to do it. Factors commonly weighed include:

• The owner's duties and level of responsibility
• Training, experience, and time devoted to the business
• What comparable businesses pay for similar services
• The size and profitability of the company

Three habits protect you. Pay the salary through regular payroll, not as an occasional lump sum. Keep a short written record of how you chose the number, using industry pay data such as Bureau of Labor Statistics figures. And revisit it each year as the business grows.

The rule also caps the benefit. Once a reasonable salary approaches the Social Security wage base, there is less profit left to move out from under the 12.4% Social Security portion, and the savings shrink.

Other benefits worth knowing about"

You keep the LLC. The election does not require you to reorganize, retitle assets, or give up the liability protection and management flexibility you chose the LLC for. You also avoid the double taxation that comes with a regular C corporation.

The qualified business income deduction still applies. Owners of pass-through businesses may deduct up to 20% of qualified business income under Section 199A. Congress made that deduction permanent in the law signed on July 4, 2025, and added a small minimum deduction beginning in 2026. LLC owners can claim it without an S election, so it is not a reason to elect by itself. What the election changes is how it interacts with your salary. Wages paid to an owner are not qualified business income, and at higher income levels the deduction is limited by W-2 wages and by whether the business is a specified service business. That is one more reason to have a CPA model the combined effect before you decide.

Tradeoffs, and when the election may not make sense:

The savings are real, but they come with costs and constraints:
• More administration. You must run payroll, make payroll tax filings, issue a W-2 to yourself, and file a separate S corporation return (Form 1120-S) with a Schedule K-1 for each owner. Bookkeeping and tax preparation fees often rise by a few thousand dollars a year.
• Scrutiny of your salary. The reasonable compensation rule is a known IRS focus, so the number needs to be defensible.
• One class of ownership. An S corporation may have only one class of stock, so distributions must track ownership percentages. The special allocations that partnership-style LLC agreements allow are not available, and most operating agreements need to be updated.
• Ownership limits. An S corporation is limited to 100 shareholders, who must be eligible persons. A foreign owner or an entity owner can end S status.
• Smaller wages for Social Security purposes. Lower W-2 pay means less earnings credited toward future Social Security benefits.
• Conversion issues. Electing S status for an existing multi-member LLC, especially one with debt or appreciated assets, can have tax consequences that deserve review first.
• Texas franchise tax. The election does not generally eliminate Texas franchise tax obligations, which apply to LLCs however they are taxed federally.

Because of these costs, the election tends to fit best when the business has steady profits and the owner works in it. Some advisors use roughly $100,000 of consistent annual profit as a rule of thumb, though the right threshold depends on your facts. It is a weaker fit when profits are modest or uneven, when a reasonable salary already approaches the Social Security wage base, or when you expect to bring in owners who would not qualify as S corporation shareholders.
Eligibility and how to make the election

To qualify, the LLC must be a domestic entity with no more than 100 shareholders, all of them eligible (generally individuals, along with certain trusts and estates), and it must have only one class of ownership. Every owner must consent to the election.

The process looks like this:
1. Confirm eligibility and review your operating agreement, since it usually needs changes to fit the one-class rule.
2. Make sure the LLC has an Employer Identification Number.
3. Complete Form 2553 and have every owner sign the consent.
4. File on time. To be effective for a tax year, the form is due no later than two months and 15 days after that year begins, which is March 15 for a calendar-year LLC. It can also be filed earlier, before the year starts.
5. If you miss the deadline, the IRS offers late-election relief under Revenue Procedure 2013-30 for entities that had reasonable cause and meet its conditions.
6. Watch for the IRS's confirmation notice (CP 261), then set up payroll so the owner's salary is paid properly from the effective date.

Timing matters now. For a calendar-year LLC, the regular deadline for a 2026 election has passed, so a 2026 election would depend on late-election relief. The next regular window for an election effective January 1, 2027 runs through March 15, 2027, and the end of the year is a good time to start the analysis.

Talk with us before you elect:

An S corporation election can be a smart move for LLC owners who work in the business and earn steady profits, but it is not automatic and it is not right for everyone. The answer depends on your profit level, how you are paid today, who owns the company, and where you want the business to go.

At Carrillo | Sipes | Tibbels, our Business & Corporate Law practice helps owners across Wise County and North Texas decide whether the election fits, update operating agreements to match, and coordinate with a CPA or your CPA who can model the numbers. If you are thinking about an election for 2027, contact our Decatur office to schedule a consultation.

This article provides general information, not legal or tax advice, and reading it does not create an attorney-client relationship. Tax law changes and every situation is different.

Sources
• About Form 2553, Election by a Small Business Corporation, Internal Revenue Service
Illustrative tax figures in this article are the author's own arithmetic using the 15.3% combined Social Security and Medicare rate and the 92.35% self-employment tax base.

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