Should my single-member LLC become an S Corporation?

An LLC is not a tax status

An LLC is a legal entity you form with the state. An S Corporation is a tax election you make with the IRS. A single-member LLC is taxed like a sole proprietorship by default: the profit goes on Schedule C of your Form 1040, and 92.35% of it is subject to 15.3% self-employment tax, up to the Social Security wage base. The LLC can elect to be taxed as an S Corporation on Form 2553 without changing anything about how it was formed.

What changes with the election

• You become an employee. You pay yourself a reasonable salary through payroll, with Social Security and Medicare withheld and matched. How to set a reasonable salary.
• The rest is a distribution. Profit above the salary passes through on a K-1 and is not subject to Social Security or Medicare tax.
• The business files its own returns. A federal Form 1120-S and a New Jersey CBT-100S every year, plus quarterly payroll returns.

A worked example

Isabella’s single-member LLC earns $150,000 of profit in 2026. She is married and files jointly, and her spouse’s salary puts her business income in the 22% federal bracket, under the income limit where the qualified business income deduction is a flat 20%. As an S Corporation, she would pay herself a $70,000 salary.

On Schedule C, Isabella’s QBI deduction is 20% of her profit less half her self-employment tax. As an S Corporation, it is 20% of the $74,645 left after her salary and the employer’s half of the payroll taxes. That is why the $10,484 shrinks to $6,481. The added costs below come out of that.

Where the break-even sits

Using the same assumptions, with a salary set at half the profit, the election saves about 3.7 cents of federal tax per dollar of profit before costs. The added costs typically run in the low thousands a year. If they run $2,000 to $3,000, it takes roughly $54,000 to $81,000 of profit just to break even. A business that justifies a lower salary breaks even sooner. One that needs a higher salary, or an owner in a higher bracket who loses more of the QBI deduction, needs more profit. Above $184,500 of earnings, the 12.4% Social Security part of the tax stops, which also changes the math. We run it on your numbers before you elect.

The costs that come with it

• Payroll. A payroll provider, quarterly federal and New Jersey payroll returns, W-2s, and New Jersey unemployment and disability contributions on your salary. We work with your payroll provider and can refer one.
• Two more returns. Form 1120-S and the New Jersey CBT-100S, prepared every year whether the business makes money or not.
• The New Jersey minimum tax. $375 with gross receipts under $100,000, $562.50 up to $250,000, $750 up to $500,000, $1,125 up to $1 million and $1,500 above.
• Bookkeeping discipline. Owner draws become distributions that have to be tracked against your basis.

New Jersey follows automatically

Since 2023, a federal S Corporation is automatically a New Jersey S Corporation unless 100% of its shareholders consent to be taxed as a C Corporation in New Jersey. New Jersey has no self-employment tax, so the savings are federal. The New Jersey tax on your income is about the same either way. The S Corporation also opens the door to the New Jersey BAIT election, which a Schedule C business cannot make. See our BAIT guide.

Timing the election

File Form 2553 within two months and 15 days of the start of the year you want it to take effect, March 15 for a calendar-year business. If the date was missed, Rev. Proc. 2013-30 allows late relief, generally within 3 years and 75 days of the intended effective date, when there was reasonable cause and the business and its owner reported income as an S Corporation all along.

This guide is general information based on the law as of the date above, not advice for your situation. Tax rules change, and the right answer depends on your numbers.