When Should I Make The S-Corp “Election” For My LLC or C-Corp?

Running a business takes guts, grit, and a whole lot of hustle. But when it comes to taxes, even the most fearless entrepreneurs often find themselves feeling overwhelmed, confused, or stuck. choosing when or even whether to make an S-CORPORATION election is one of the biggest tax decisions a business owner can face.

It’s not just about saving money this year; it's about building long-term wealth, protecting yourself from audits, and setting your business up for smart, sustainable growth.

Unfortunately, many business owners either wait too long, make the election too soon, or worse never hear about this strategy at all.

At Make Taxes Fair, we believe friends don’t let friends overpay the government.

That’s why we created this resource to break down the who, what, when, and why of S-Corp elections in a clear, practical, and empowering way.

In the next sections, you'll learn:

• Exactly what an S-Corp is (and what it isn’t),

• How to know when it’s the right move for your business,

• How it can save you money immediately and in the long run, and

• How to protect yourself from costly mistakes that could trigger IRS audits.

Let’s simplify the complex and turn confusion into confidence.

Foundational Basics: What is an S-Corporation?

Before we dive into when to make the S-Corp election, let’s first get crystal clear about what an S-Corporation actually is and why it matters.

First, the biggest misconception to clear up:

An S-Corporation (S-Corp) is not a type of business entity. If you go to an attorney and ask them to create an S-Corporation, they will generally respond with “Perfect, do you want a Limited Liability Company (LLC) or a C-Corporation?”

This is because the “S-Corp” is a special tax status that you can elect by filing paperwork with the IRS. The bottom line is, you must create your legal structure first as an LLC or a C-Corporation and then make the “election” to be taxed as an S-Corp. The S-Corp election changes how your business profits are taxed, not how your business is legally structured.

Why Business Owners Choose S-Corp Status

The IRS allows certain businesses to elect S-Corp status to avoid getting hit twice by taxes, once at the business level and again at the personal level.

Here’s how it works:

The Bottom Line:

Choosing S-Corp status can help a business owner legally pay less in self-employment taxes, while keeping personal asset protection if they are already an LLC or corporation.

What S-Corp Status Requires

It’s not all savings and sunshine, though.

To benefit from S-Corp status, you must:

• Pay yourself a reasonable salary for the work you perform (not just distributions),
• Set up a formal payroll system (yes, even if you're the only owner),
• Keep corporate records like meeting minutes and financial statements​​.

These requirements are critical, not just for compliance, but also for audit protection.
(Later sections will show you exactly how to stay safe.)

Why Consider S-Corp Status?

You might be wondering 

"If forming an S-Corp takes extra work, why bother at all?"

The short answer:

Because it can save you thousands in taxes each year while building a stronger financial future for your business and yourself.

Let’s break down the core benefits:

1. Slash Your Self-Employment Tax Liability

As a sole proprietor or a regular LLC owner, you pay self-employment tax (15.3%) on every dollar of business profit.

That tax covers Social Security and Medicare and it’s on top of your income taxes.

With an S-Corp, you only pay self-employment (payroll) taxes on your reasonable salary not on the entire business profit.

Example:

• Your business earns $120,000 in profit.

• You pay yourself a reasonable salary of $60,000.

• You pay self-employment taxes on the $60,000 salary, not the full $120,000.

• The remaining $60,000 is distributed to you without self-employment tax.

The Result: Significant tax savings. (Often $8,000–$12,000+ per year, depending on income.)

2. Open the Door to More Strategic Deductions and Fringe Benefits

Once you become an S-Corp, you can tap into additional smart strategies that sole proprietors often miss out on​​:

• Health insurance reimbursement for yourself and your family

• Accountable Plans to reimburse business expenses tax-free

• Fringe benefits like retirement plans, educational assistance, and even rental deductions​ through the Augusta Rule.

These benefits aren’t just "nice-to-haves"  they can create major tax savings every year.

And those tax savings are unlocked by creating an entity. Many tax strategies are simply not applicable if you are operating as a Sole Proprietorship (filing the Schedule C) or a “single member LLC” that has not made the S-Corp election.

3. Stronger Audit Protection

The IRS expects more formalities from an S-Corp and that’s a good thing.

Doing the work of filing payroll, issuing W-2s, keeping Corporate meeting minutes, and separating business and personal finances builds a strong paper trail​​.

This proactive structure helps protect you:

• If the IRS ever audits your business,

• If you want to sell the business,

• Or if you seek funding, partners, or investors.

Remember: Systems don’t just save taxes; they create strength.

4. Set Yourself Up for Long-Term Wealth Building

S-Corp owners can contribute to larger retirement plans (like Solo 401(k)s or SEP IRAs) while keeping tax burdens lower​.

This means you can:

• Save more pre-tax dollars for retirement,

• Reduce your taxable income today,

• Grow wealth tax-free for tomorrow.

While we at Make Taxes Fair are not financial advisors or investment advisors, we can confidently say that we have NEVER heard a client say “Gosh, I wish I hadn’t saved so much for my retirement!” It’s usually the opposite, where clients say “I wish I had saved more for my later years!”

When Does It Make Financial Sense to Elect S-Corp?

S-Corp status can be a game changer, but only if the timing and numbers are right. Choosing S-Corp too early or too late can actually cost you money, add unnecessary complexity, or even trigger IRS scrutiny.

Let’s break it down:

1. The Magic Threshold: Net Income of $60,000–$80,000 or more

As a rule of thumb:

If your business is consistently generating at least $60,000–$80,000 of net profit after expenses, it’s time to seriously consider making the S-Corp election​.

Why?

Because below this level, the cost and complexity of maintaining an S-Corp (payroll systems, corporate compliance, etc.) will likely outweigh the tax savings. When you’ve reached those NET revenue levels, the tax savings typically far outweigh the added compliance costs.

As we like to say, “Is the juice worth the squeeze?” Running an S-Corporation takes effort and additional steps, and resources. We want to make sure the extra effort is putting you financially ahead rather than creating additional burden for you.

2. Factors to Consider Before Electing

Consistent Profitability

If your business income is unpredictable (e.g., fluctuating wildly month-to-month), it might make sense to wait until your income stabilizes.

Willingness to Run Payroll

S-Corp owners must pay themselves a reasonable salary through a formal payroll system.
(We’ll dive deeper into what “reasonable” means soon it’s critical to stay compliant!)

Cost of Compliance

Expect to budget for:

• Payroll processing fees ($50–$150/month),

• Bookkeeping systems upgrades,

• Filing of IRS Form 1120-S (annual corporate tax return),

• State-specific business & legal compliance filings.

Plans for Growth

If your business is scaling rapidly, it may make sense to elect S-Corp status early, even if you're just hitting the $60-$80K mark, to get systems in place proactively.

3. Visual: Simple “Should I Elect S-Corp?” Checklist

If you answered YES to most of these, congratulations, you’re a strong candidate for S-Corp election!

4. Key Deadlines to Know

To have your S-Corp election take effect for a given tax year, you generally must:

• File IRS Form 2553 within 2 months and 15 days after the beginning of that tax year (e.g., by March 15 for calendar year businesses).

Did you miss that deadline? Don’t panic, there are late election relief options available if you have reasonable cause. (We’ll cover that briefly later.)

Timing Is Everything

• Elect too soon? You waste money on payroll and compliance costs.

• Elect too late? You miss out on major tax savings.

• Elect strategically? You protect profits, optimize taxes, and position your business for serious growth.

How and When to Make the Election

Once you’ve decided S-Corp status makes sense for your business, it’s critical to understand how to actually make the election and when to do it.

Getting the paperwork and timing right ensures you maximize your savings and stay compliant with IRS rules.

1. How to Make the S-Corp Election

The S-Corp election is made by filing a specific form with the IRS:

File IRS Form 2553: "Election by a Small Business Corporation"

Here’s what the process generally looks like:

Step 1: Set up your entity

• You must first create an LLC or a C-corporation (you can’t elect S-Corp as a sole proprietor).
• If you’re an LLC, you remain an LLC for legal purposes, you’re just asking to be taxed as an S-Corp.
• Creating an LLC or C-Corporation must be done at the State level with the Secretary of State. This is a legal process to file those legal forms. While Make Taxes Fair does not perform those services we can recommend an attorney who can handle this for you.

Pro Tip: 

We DO NOT recommend that you use a DIY service such as Legalzoom, etc. You don’t perform surgery on yourself (or at least we hope not!) An experienced physician would be trusted with your health and wellness. Don’t leave important foundational legal matters where there are nuanced and seemingly minor details left unaddressed.

Engage a professional, licensed, and qualified attorney to do the work of setting up your LLC or Corporation and save yourself potential headaches down the road.

Step 2: Fill out Form 2553

Once you have created your LLC or Corporation, you will then want to file the Form 2553 with the IRS. 

This form serves the purpose of:

• Providing basic business information to the IRS

• Select the effective date of your election to be an S-Corporation

• Getting signatures from all shareholders (even if you’re the only one).

Step 3: Submit Form 2553 to the IRS

• Follow the directions on the form instructions (or engage Make Taxes Fair to assist you with tax planning and we will handle this for you).
• You can fax or mail the form (at the time of the drafting of this article, the IRS still processes these forms manually, welcome to 1983).

Step 4: When to File Form 2553

Timing matters a lot here.

To have your S-Corp election apply for a given year you must file Form 2553 within 2 months and 15 days after the start of the tax year.

For example:

• If your business operates on a calendar year, your deadline is March 15.

Hot Tip: If you just started a new business, you can elect S-Corp as part of your startup paperwork but you still have that 2-month, 15-day deadline after you officially form your entity.

3. What If You Miss the Deadline?

Don’t worry, many businesses miss it and still get approved.

The IRS allows late elections if you can show "reasonable cause" for missing the deadline.
This typically involves:

• A letter explaining why you were late (for example, not being aware of the requirement),

• Evidence that you acted as an S-Corp in practice (e.g., paying yourself a salary, keeping corporate minutes, etc.).

Pro Tip: Late election relief isn’t automatic. But with good documentation and support, most reasonable requests are approved.

No Election = No S-Corp Benefits

Without officially filing Form 2553, you can’t treat your business as an S-Corp, even if you intended to.

File it. Confirm it. Save it.

This single piece of paper could save you tens of thousands of dollars over your business lifetime.

Ok, I’m an “S-Corp Now”... How to Protect Yourself from IRS Scrutiny

Saving on taxes is powerful but it’s equally important to stay compliant and protect yourself from audits. The IRS loves auditing S-Corporations that get sloppy.

That’s why at Make Taxes Fair, we teach clients not just how to save, but how to build audit-proof systems along the way.

Here’s what you need to know:

1. Pay Yourself a “Reasonable Salary”

What the IRS Expects:
As an S-Corp owner-employee, you must pay yourself a reasonable salary for the services you perform before taking distributions.

Reasonable = What you would pay someone else to do the same job in your location and industry​.

Factors the IRS looks at:

• Duties and responsibilities

• Time and effort devoted to the business

• What similar businesses pay for similar work

• Your training, education, and experience

• The use of comparable industry salary surveys

Example: If you're a freelance web designer earning $100K, and market rates for similar roles are $60K/year, paying yourself $10K and taking $90K in distributions would be a huge red flag.

Pro Tip:

Set a defensible salary and document how you determined it (use salary data, job ads, labor statistics).

And if you want to take the guesswork out of this, you can check out our resources that we have at MakeTaxesFair.com/Resource-Center that help you dissect the process of creating a “reasonable compensation” report.

2. Set Up a Formal Payroll System

You cannot just "transfer" money randomly to yourself and call it salary. Well, honestly you can do that but the IRS will classify those as owner draws or distributions of profit.  The right way to pay yourself a salary is by setting up a formal payroll system.

To execute this the right way you must:

• Run regular payroll (biweekly, monthly, etc.),

• Issue yourself a W-2,

• Withhold and remit payroll taxes (Social Security, Medicare, federal/state withholding),

• File quarterly payroll reports if required.

Pro Tip:

Use a payroll service to automate this.  Most payroll services cost between $50–$150/month. 

For that service fee, a competent payroll provider should be handling the payroll filings, sending payments to the IRS & State (if applicable). Well worth the price you pay to remove this to-do off your plate and outsource to a dedicated team that performs these duties all the time.

3. Maintain Corporate Formalities

Remember: even if you’re a one-person S-Corp, you must act like a real corporation.

Best practices include:

• Keeping minutes of annual meetings (even if it’s just you),

• Recording major decisions (like setting your salary),

• Maintaining a separate business bank account,

• Never mix personal and business finances​,

• Proper bookkeeping and regular financial reviews.

4. Common Audit Triggers (and How to Avoid Them)

Systems Protect Profits

Systems aren’t just about compliance, they’re about peace of mind. Strong systems mean you can confidently enjoy your tax savings without fear of a devastating IRS audit.

One of the biggest red flags for the IRS is how you handle the split between owner wages and distributions. If you're paying yourself too little in wages or skipping payroll entirely, they see it as tax avoidance. A documented, defensible system for setting and paying reasonable compensation is what keeps you protected and your savings secure.

Short-Term and Long-Term Tax Savings Opportunities

When you elect S-Corp status and run it properly, the rewards go beyond just a lower tax bill today. S-Corp owners have a unique opportunity to use their business structure to:

• Save thousands immediately,

• Build real wealth strategically over time.

Let’s break it down:

1. Short-Term Wins: Immediate Tax Savings

Save on Self-Employment Taxes

• Only your salary is subject to Social Security and Medicare taxes.

• Dividends (distributions) are not.

• Depending on your profits and salary setup, this can save you $8,000–$15,000+ per year right away.

Access New Deductions

S-Corps unlock access to additional, powerful deductions​​​:

• Health insurance premiums paid or reimbursed by your S-Corp (saving thousands annually),

• Accountable Plans for home office, vehicle mileage, business supplies (turning personal costs into deductible business expenses),

• Tax-free fringe benefits like education assistance, dependent care, and achievement awards.

Reimburse Yourself Tax-Free

Using an Accountable Plan, you can legally reimburse yourself for work expenses without it counting as income​​.

2. Long-Term Wins: Wealth Building and Legacy Creation

Boost Retirement Contributions

S-Corp owners can:

• Set up a Solo 401(k)

• Make both "employee" and "employer" contributions,

• Potentially shelter tens of thousands of dollars per year tax-deferred for retirement​.

Better Exit Planning

If you ever want to sell your business, having it organized as an S-Corp makes it:

• Easier to transfer ownership,

• More attractive to buyers,

• Potentially eligible for Section 1202 exclusions (qualified small business stock gains).

Strategic Real Estate Moves

S-Corps can facilitate strategies like renting your personal residence to your corporation for tax-free rental income (up to 14 days a year)​.

Cumulative Impact

Over 5, 10, 20+ years of business ownership:

• S-Corp savings and strategies can mean hundreds of thousands, even millions in additional wealth accumulation.

S-Corp Status Is a Catalyst

An S-Corp isn’t just about paying less today it’s about building financial strength, freedom, and options tomorrow.

The small effort it takes to set up and maintain an S-Corp structure pays massive dividends across your business life cycle.

Real-World Scenarios

Sometimes the best way to understand a strategy is to see it in action. Here are three real-world examples showing how timing the S-Corp election can transform a business owner's tax life.

Case Study 1: The Startup Solo Entrepreneur

Profile:

• Maria, a freelance graphic designer

• Year 1 income: $20,000

• Year 2 income: $65,000

• Year 3 projected income: $80,000

Situation:
In her first year, Maria wisely stayed a simple LLC; the extra complexity of an S-Corp wasn't worth it yet.

By mid-Year 2, her income crossed the $60,000 mark. She spoke with a tax strategist (good move!) who recommended filing Form 2553 for the next tax year.

Result:
In Year 3:

• Maria paid herself a $45,000 salary,

• Because she was an S-Corporation, she was able to utilize tax strategies like the Accountable Plan & the Augusta Rule which resulted in taking $25,000 additional deductions and $25,000 out of her business tax free!

• Took $10,000 in distributions (saving thousands in self-employment taxes),

• Funded a Solo 401(k) with $40,000+ of pre-tax contributions.

Case Study 2: The Scaling Consultant

Profile:

• David, business consultant

• Net profit: $110,000 in Year 1

Situation:
David didn't elect S-Corp status when he started but with his fast success, he realized he was leaving money on the table.

He worked with Make Taxes Fair and filed a late S-Corp election for Year 1, providing reasonable cause (new business owner, unaware of election requirements, etc.).

Result:

• IRS accepted his late election,

• David paid himself a $70,000 salary and took $40,000 in distributions,

• Saved approximately $6,000 in payroll taxes for that first year alone.

Late election + compliance = major tax win.

Case Study 3: The Real Estate Professional

Profile:

• Lisa, licensed real estate agent

• Yearly commissions: $150,000

Situation: Lisa was operating as a sole proprietor, paying full self-employment taxes on all her income.
After a review, she elected S-Corp status for the following year.

Result:

• Paid herself an $80,000 reasonable salary,

• Took $50,000 in distributions,

• Set up an Accountable Plan to reimburse home office expenses & implemented the Augusta Rule for a combined deduction of $20,000 for the year and $20,000 of TAX FREE withdrawals from her business.

• Opened a Solo 401k and contributed $40,000+ pre-tax.

Total estimated savings: Over $18,000 in just the first year.

Takeaway: Timing + Strategy = Maximum Savings

Each of these business owners took action at the right time not too early, not too late. They didn’t just save money once, they set themselves up for compounding tax savings success over time.

Your S-Corp decision could be one of the most valuable financial moves you ever make, if you time it wisely and manage it intentionally.

Final Thoughts: Take Control of Your Tax Destiny

Choosing when to make the S-Corp election is more than just a tax decision!

It’s a declaration that you’re serious about protecting your profits, building wealth, and running your business like a true CEO.

Timing it right means unlocking major savings today and creating a powerful foundation for tomorrow.

Timing it wrong or not making the election at all, could mean leaving tens of thousands (or more) on the table over the lifetime of your business.

At Make Taxes Fair, we’re here to empower you with the tools, systems, and support to navigate this critical choice with clarity and confidence.

You deserve to keep more of what you earn.
You deserve to grow your wealth intentionally, not accidentally.
You deserve to play the tax game the way the winners do, legally and strategically.

How We Can Help

At Make Taxes Fair, we believe taxes shouldn’t be a source of fear, confusion, or frustration.

Instead, with the right systems and strategies in place, your taxes should be a tool to build wealth and security, not a penalty for your success.

If you're unsure about whether S-Corp status is right for you or when to make the election, you're not alone.

Most business owners have never been taught how to time this critical move.

That’s where we come in.

Here’s How We Can Help You:

1. S-Corp Readiness Assessment
   We’ll help you review your business's numbers and growth trajectory to determine if (and when) S-Corp election makes the most sense.
2. Election Filing Support
   For our clients who engage with us for tax strategy support, we can guide you through filing Form 2553 properly whether you’re early in the year or needing late election relief.
3. Reasonable Salary Benchmarking
   We help you set a salary that protects you from IRS audits while maximizing your tax efficiency.
4. Systems Setup for Compliance
   We don’t just file paperwork and walk away, we’ll show you how to:

• Implement payroll systems,
• Set up meeting minutes and corporate formalities,
• Create an audit-proof foundation to leverage the tax strategies that are opened up to you by selecting the S-Corporation status

5. Strategic Tax Planning for Growth
   S-Corp status is just the beginning.
   We’ll help you unlock the full benefits of retirement plans, fringe benefits, deductions, and future exit planning.

Your Next Step:

Now it’s time to take action. If you have questions, reach out and start a conversation.

Schedule a strategy session with us today and take the first step toward tax confidence, audit protection, and wealth-building through an innovative business structure.

Because at Make Taxes Fair, we live by one battle cry: Friends Don’t Let Friends Overpay the Government.