A limited liability company (LLC) can choose to be taxed as an S corporation if it meets certain Internal Revenue Service (IRS) requirements. An LLC can keep its default tax classification or elect to be treated as a C corporation. Electing S corporation tax status is simple, but it’s not always the right choice.
To cancel this election, known as a "Voluntary Revocation of S-Corporation Status," send three items to the IRS: Letter of Revocation, Statement of Consent for S Election Revocation, and IRS Form 8832. Instructions for these forms are found in "How to revoke an S-Corp election." For questions, call the IRS at 800-829-4933.
Electing to have your LLC taxed as an S Corporation can offer benefits: You’ll legally be an LLC with cheaper start-up costs and can run your business without S-corp regulations. The remaining earnings after FICA-subject pay can be distributed tax-free to owners.
However, there are certain disadvantages such as heavy IRS scrutiny to ensure that payments are not improperly characterized as non-wage distributions.
To elect S corporation tax status, file Form 2553 with the IRS. This form is attached to a 1120S return that must be filed annually by S corporations. LLC taxed as an S-Corp can change status any time by filing Form 2553.
LLCs that elect S Corp taxation are treated differently compared to those with default pass-through taxation. An LLC taxed as a partnership’s owner is not an employee for tax purposes, while an S corporation owner is considered an employee. By default, LLC income passes through to owners who pay self-employment taxes.
To elect S corporation status, an LLC must meet IRS requirements. This election allows for potential tax savings depending on individual circumstances. It is a popular option among freelancers, as it allows the experience of both LLC limited liability and taxation benefits.