This guide provides an overview of Form 2553, detailing the steps necessary for a business to elect S corporation status for tax purposes.
scroll for more
Starts at $0 + state fees and only takes 5-10 minutes
For small business owners of LLCs and corporations out there, you have some flexibility when it comes to your tax classification. If you want to file your taxes as an S corporation, then you must fill out Form 2553. IRS rules require it to qualify to be taxed as an S corporation. What is IRS Form 2553, and what are the instructions for Form 2553? We delve into Form 2553 for an LLC and corporation below.
Form 2553 is a tax form used by limited liability company (LLC) and C corporation owners to elect to be treated as an S corporation for federal income tax purposes. By making this election, a C corporation can avoid double taxation on corporate income. An LLC owner may be able to pay less in self-employment taxes by filing as an S corp. Our “What is an S Corporation?” page explains how this works.
The form is filed with the IRS and must be signed by all the owners of the business. Form 2553 should be filed no more than 2 months and 15 days after the start of the tax year the election is to take effect, or any time during the tax year preceding the tax year it is to take effect.
Filing Form 2553 offers advantages in terms of tax treatment for a corporation or LLC. Let’s examine the difference between how a C corporation and an S corporation are taxed, then examine the differences between S corps and LLCs.
The IRS treats C corporations as separate, tax-paying entities. The corporation itself pays corporate income taxes on profits at the corporate tax rate. Then, shareholders pay personal income taxes on any dividends they receive. These shareholder taxes are calculated at the individual’s personal tax rate. This process is known as double taxation because it essentially taxes the same income twice.
S corporations, on the other hand, are considered pass-through entities. Any profits, losses, credits, and deductions pass through to the owners, who report everything on their personal tax returns. The S corporation doesn’t pay its own income taxes. Instead, the owners pay taxes on this money on their personal income taxes. This tax treatment is called pass-through taxation. Small business owners find this method of taxation advantageous because they often pay less in taxes and have more money left to reinvest back into the company.
How does S corp taxation differ from standard partnership-style taxes for an LLC? The major difference is in regard to self-employment taxes. LLC members have to pay self-employment taxes (both the employee and employer shares of Medicare and Social Security) on all net earnings. With S corp taxation, you’d only pay self-employment taxes on your salary, not the rest of your profits.
One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $1 and avoid contributing anything to Social Security and Medicare. The IRS doesn’t give a precise definition, but it seems to consider “reasonable” to be something similar to what others in your field are earning for the same work.
If you’re wondering which form of taxation is better for your LLC, contact an accountant.
Not all businesses can file Form 2553 and make an S corporation election. The IRS has strict requirements and limitations.
For a corporation or LLC to qualify for S corporation status, it must:
For more details about the IRS’s requirements, read through the Instructions for Form 2553 posted on the IRS website.
Depending on when you want the election to take effect, you can file Form 2553 at two different points during the year. If you want the election to be effective during the current tax year, you must file Form 2553 within the first two months and 15 days of the year. If you file the form anytime after that, the S corporation status will go into effect during the next tax year.
Check out the instructions for Form 2553 for examples of the different filing times. In limited situations, the IRS makes exceptions for late filings. Keep in mind that your state may require you to file additional forms, so check with your state’s Secretary of State and Department of Taxation for more information.
Form 2553 is used by small business corporations and LLCs to elect to be taxed under Subchapter S of the Internal Revenue Code. To fill out Form 2553, you’ll need to provide the following information:
You can find the 2553 IRS Form and instructions on the IRS website. It’s advisable to consult with a tax professional or accountant to ensure that you’re filling out the form correctly and to understand the tax implications of electing to be taxed as an S corporation.
2553 IRS Form is used to elect S corporation status for a small business. To file Form 2553, you’ll need to complete the following steps:
Form 2553 should be filed within 2 months and 15 days of the beginning of the tax year for which the election is to be effective. This means that if the tax year begins on January 1st, IRS Form 2553 must be filed by March 15th. If the election is to be made for a short tax year, the corporation must file Form 2553 during the period that begins November 8 and ends January 22.
Recommended article: Completing the Beneficial Ownership Information Form: Step by Step
ZenBusiness can help you. We make it fast and simple to start, run, and grow your business. If you want to form an LLC with us with S corp election, our S corp service can help.
We offer everything you need all in one place. The ZenBusiness platform was built to meet your needs throughout the life of your business. Once you get started with ZenBusiness, you’ll have access to a personalized dashboard for storing important formation documents, receiving state compliance alerts, or even managing a domain name and website for your business. Again, it’s everything you need to run your LLC, corporation, or S corp all in one place.
Does an LLC have to file Form 2553?
An LLC only needs to file Form 2553 with the IRS in order to be taxed as an S corporation. Form 2553 is used to make an election for S corporation status, which, for an LLC, can sometimes lower the amount of taxes the members will pay in taxes for Social Security and Medicare. However, whether or not an LLC should file Form 2553 depends on the specific circumstances of the company and should be discussed with a tax professional.
Can I file IRS Form 2553 online?
Yes, you can file IRS Form 2553 online through the IRS e-file system. This system, called the IRS e-file, allows taxpayers to file their forms electronically using tax preparation software or through a tax professional.
Which is better for taxes, LLC or S corp?
LLCs and S corps are both considered pass-through entities, meaning that the business itself does not pay taxes on its income. Instead, the profits and losses are passed through to the individual owners, who report them on their personal tax returns. This is an contrast to a C corporation, which taxes the business’s profits twice, once at the business level and again when those profits are distributed to the individual owners.
Even though a traditional LLC already has pass-through taxation, it could still benefit from electing S corp status (check out pass-through taxation definition). It takes a bit of explanation, but it could mean saving thousands of dollars.
The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (the taxes earmarked for Social Security and Medicare, which add up to 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay half of them.
When the members elect S corp status, though, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay self-employment taxes on their salary and not the profits they receive. (Of course, this is only for self-employment taxes; LLC members still must pay income and other applicable taxes on their profits.) This can add up to quite a lot for certain profitable LLCs. Check out LLC members definition.
One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $2 and avoid contributing anything to Social Security and Medicare. The IRS considers “reasonable” to be something similar to what others in your field are earning.
It’s best to consult a tax professional or attorney to determine which business structure is best for your specific situation.
Why would you choose S corp over LLC?
As we explained above, members of certain LLCs can save on self-employment taxes by being employed by the LLC. But a traditional LLC can’t employ its owners without an S corp election.
Tax Form Resources
How to File an S Corp in Your State
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
Ready to Start Your LLC?
Start Your LLC