LLC first, tax treatment second
An LLC is a legal structure. It is formed with the state and it separates the business from you personally. It does not decide how you are taxed.
By default a single member LLC is taxed like a sole proprietorship: all the profit lands on your personal return and all of it is subject to self employment tax, about 15.3% on top of income tax. A multi member LLC is taxed as a partnership.
An LLC can choose to be taxed as an S corporation instead. That election is where the tax savings come from, and it is also where most of the mistakes happen.
Watch: S corp conversion in 2 minutes
How the S corp election actually saves tax, what a reasonable salary means, the deadline, and when it is worth it.
Read the transcript
Making good money as a sole proprietor or single-member LLC? You've probably heard an S corp can lower your taxes. Here's how it works, and when it makes sense.
Right now, self-employment tax, up to 15.3%, generally applies to nearly all of your net profit, on top of income tax.
An S corp isn't a new business. It's a tax election. Your LLC or corporation stays the same, it just chooses to be taxed as an S corporation.
Inside an S corp, you pay yourself a reasonable salary through payroll, and payroll taxes apply to that salary. The rest of the profit can come out as distributions, which aren't subject to self-employment tax.
So, what's a reasonable salary? It should match what you'd pay someone else to do your job. Setting it too low is a common audit issue.
What does it cost to run? Payroll, quarterly payroll filings, a separate S corp tax return, and clean monthly books. Some states add their own fees or taxes.
Timing matters. To be taxed as an S corp for this year, Form 2553 is generally due within 2 months and 15 days after the start of the tax year. Late election relief is sometimes available.
And at what profit does it make sense? There's no single number. It depends on your profit, a reasonable salary for your role, your state, and those costs. It usually pays off once profit is steady and well above a reasonable salary.
It's a fit if your profit is steady, and you're ready for payroll and clean books. Not yet, if profit is small or uneven.
Here's what we'll do for you. We run a reasonable compensation study, form the LLC if you need one, file the S corp election, and set you up with payroll, accounting and compliance guidance, plus a checklist for next steps.
What it costs. The S corp conversion package is a fixed $1,500. S corp tax returns start at $1,500 a year, and state filing fees are separate. The final price is confirmed after we look at your situation.
On the free discovery call, we look at your numbers, confirm it fits, and you leave with a clear next step and a price. Book yours at nxtlevelcpa.com.
General education, not tax advice for your situation.
When an S corp makes sense
As an S corp, you pay yourself a salary through payroll. Payroll taxes apply to the salary. The remaining profit comes out as distributions, which are not subject to self employment tax.
The savings are real, but so are the costs:
- You have to run payroll, with quarterly filings and year end W-2s
- You file a separate business return every year
- The salary has to be reasonable for the work you actually do
- North Carolina also charges franchise tax on S corps, which LLCs taxed as partnerships or sole proprietors do not pay
So the question is not whether an S corp saves tax. It is whether your profit is high enough that the savings clear the extra cost with room to spare. We run that math on your real numbers before you file anything.
Reasonable salary is the whole game
The IRS expects an S corp owner who works in the business to be paid what the job is worth. Set it at zero or at a token amount and you have created one of the more common audit issues for small S corps. Set it too high and you have given the savings away.
Our S corp conversion package includes a reasonable compensation study: a documented salary figure based on your role, hours, industry and profit. It is what you point to if the number is ever questioned.
Then the salary has to actually run through payroll during the year, not be booked at year end. If the business does better than expected, the salary gets revisited in the fall. That is part of tax planning.
Timing the S corp election
The election is made on IRS Form 2553. To apply from the start of a calendar tax year, it is generally due by March 15 of that year. For a brand new entity, it is due within two months and 15 days of the date the business began.
Missed it? The IRS has relief procedures for late elections when there is reasonable cause, and they are used often. Better to plan it, though, because the effective date controls which months of profit get the S corp treatment.
North and South Carolina specifics
North Carolina
- LLCs are formed with the NC Secretary of State by filing Articles of Organization
- Every NC LLC files an annual report by April 15, with a $200 fee
- S corps and C corps pay NC franchise tax. LLCs taxed as partnerships or disregarded entities do not
- North Carolina has no general city or county business privilege license, but some trades need a state license. Contractors, see accounting for contractors
South Carolina
- LLCs are formed with the SC Secretary of State
- SC LLCs taxed as partnerships or disregarded entities do not file an annual report. Corporations, including S corps, do
- Most SC cities and counties require a business license, renewed each year by April 30
Forming in one state and working in the other adds a registration and a second set of returns. If that is you, read NC and SC dual-state taxes first.
What the packages include
LLC Formation, $750: formation filing preparation, federal EIN application, initial tax classification guidance, an accounting and compliance setup checklist, and post formation guidance.
S Corp Conversion, $1,500: reasonable compensation study, LLC creation when the conversion needs one, the S corp election filing, guidance on payroll, accounting and ongoing compliance, and a handoff checklist.
State filing fees, registered agent charges, licenses and legal advice are separate. Once you are set up, most owners move into one of our outsourced accounting packages so payroll, books and returns stay in one place.
What clients say
“My wife started a new small business last year so that gave us even more anxiety filing our taxes this year. He walked us through each and every step and even laid out plans for next year's taxes. He put us at ease and we got a good return on our taxes.”
“I also had the chance to review the report and ask questions, which helped me understand how to improve in the future.”
“He not only helped to reduce my tax bill substantially but he also gave me some advice for moving into the next year feeling confident I wouldn't be in the same position again.”
Questions we get asked
Does forming an LLC change how I am taxed?
Not by itself. An LLC is a legal structure formed with the state that separates the business from you personally. By default a single member LLC is taxed like a sole proprietorship, with all profit subject to self employment tax of about 15.3% on top of income tax. A multi member LLC is taxed as a partnership.
Should my LLC be taxed as an S corp?
Only if your profit is high enough that the payroll tax savings clearly exceed the extra costs of payroll, a separate business return and, in North Carolina, franchise tax. We run that comparison on your real numbers before recommending it, so you know whether the savings clear the cost with room to spare.
When is the S corp election due?
For an existing business on a calendar year, Form 2553 is generally due by March 15 to take effect that year. For a new entity, it is due within two months and 15 days of the business starting. Relief is often available for late elections.
What is a reasonable salary for an S corp owner?
What you would have to pay someone else to do the work you do, based on your role, hours and industry. Set it too low and it invites IRS attention; set it too high and you give away the savings. Our S corp conversion package includes a documented reasonable compensation study you can point to if it is questioned.
Does my LLC have to file an annual report?
In North Carolina, yes. Every NC LLC files an annual report with the Secretary of State by April 15, with a $200 fee. In South Carolina, LLCs taxed as partnerships or disregarded entities do not file an annual report, but corporations, including S corps, do. Forming in one state and working in the other adds a registration.
Do I still need to file a beneficial ownership (BOI) report?
Not for most U.S. businesses. In March 2025 FinCEN removed the beneficial ownership reporting requirement for companies formed in the United States. Foreign companies registered to do business in the U.S. may still need to file. Rules in this area have changed several times, so we confirm the current status when you form.