To convert an LLC to an S Corp, you file IRS Form 2553 to elect S corporation tax treatment; you do not dissolve the LLC, form a new entity, or get a new EIN. The election must reach the IRS by the 15th day of the third month of the tax year you want it to cover (March 15 for calendar-year businesses), every member has to consent, and the LLC has to meet the federal eligibility rules. Once the election takes effect, you run payroll, pay yourself a reasonable salary, and file Form 1120-S each year.
Decide Whether the Election Is Worth It
An LLC’s default tax treatment sends all net profit through to the owners’ personal returns, where it is subject to self-employment tax.1Internal Revenue Service. Limited Liability Company (LLC) That rate is 15.3 percent: 12.4 percent for Social Security on earnings up to $184,500 in 2026, plus 2.9 percent for Medicare on all earnings.2Social Security Administration. Contribution and Benefit Base It applies to every dollar of net profit whether or not you take the money out.
Under an S corporation election, only the salary you pay yourself is subject to Social Security and Medicare taxes. The rest of the profit, distributed to you as an owner, escapes those payroll taxes. On $120,000 in net profit with a $70,000 reasonable salary, roughly $50,000 in distributions avoids the 15.3 percent bite, saving about $7,650.
Two things temper the math. Wages you pay yourself as an owner-employee are not qualified business income, so they shrink your Section 199A deduction. And the ongoing costs of payroll processing, quarterly filings, and a separate corporate return add up. When an LLC’s net income is roughly under $40,000 to $50,000, those costs can eat the savings or wipe them out entirely.
Confirm the LLC Is Eligible
Federal tax law limits which entities can elect S status.3Office of the Law Revision Counsel. 26 USC 1361 – S Corporation Defined Your LLC must meet all of these:
- It is organized under the laws of a U.S. state.
- It has 100 or fewer members. Family members can elect to count as a single shareholder.
- Every member is a U.S. citizen or resident alien, or a qualifying trust or estate. No corporations, partnerships, or nonresident aliens.
- All members hold a single class of ownership interest with identical rights to distributions and liquidation proceeds. Different voting rights are fine; different economic rights are not.
Break any of these rules at any point and the election terminates automatically. Admitting a nonresident alien member or issuing an ownership interest with different distribution rights ends S status the moment it happens.
File Form 2553
The conversion happens through Form 2553, “Election by a Small Business Corporation.”4Internal Revenue Service. About Form 2553, Election by a Small Business Corporation Filing Form 2553 automatically classifies the LLC as a corporation for tax purposes, so you do not need to file Form 8832 separately.5Internal Revenue Service. Form 8832 Entity Classification Election Instructions You also keep your existing EIN; electing S status does not require a new one.6Internal Revenue Service. When to Get a New EIN
The form collects the LLC’s legal name, business address, EIN, state and date of formation, and chosen tax year. Most S corporations must use a calendar year ending December 31; a different fiscal year requires showing the IRS a valid business purpose.7Office of the Law Revision Counsel. 26 USC 1378 – Taxable Year of S Corporation
Get Every Member’s Consent
Every member has to sign the consent section of Form 2553, listing name, address, SSN or TIN, ownership percentage, and the date the interest was acquired.8Internal Revenue Service. Form 2553 – Election by a Small Business Corporation One holdout and the IRS will not process the election. If a member lives in a community property state, the member’s spouse must also sign, even if the spouse is not on the LLC’s books, because community property law gives the spouse an interest in the stake or its income.9Internal Revenue Service. Instructions for Form 2553
Pick the Effective Date
The effective date tells the IRS when to start taxing the LLC as an S corporation. To have the election cover the current calendar year, enter January 1. For a brand-new LLC, the effective date is generally the date the business first had assets, began operations, or had members.
Hit the Deadline
Form 2553 must reach the IRS no later than the 15th day of the third month of the tax year you want the election to cover.10Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination For calendar-year businesses, that is March 15. You can also file any time during the preceding tax year, so a November or December filing makes the election effective the following January 1.
File after March 15 and the election normally slips to the next tax year unless you qualify for late-filing relief. The IRS accepts Form 2553 by mail or fax to the service center designated for your state. Certified mail with return receipt gives you proof of the filing date if the IRS ever questions it.
Late Election Relief
Missing March 15 does not automatically cost you a full year. Under Revenue Procedure 2013-30, the IRS can treat a late election as timely if all of the following are true:11Internal Revenue Service. Revenue Procedure 2013-30
- You intended to be an S corporation as of the requested effective date.
- You file for relief within three years and 75 days of that intended effective date.
- The only reason you did not qualify was that Form 2553 was not filed on time.
- You have reasonable cause for the delay, such as reliance on a tax professional who failed to file, and you moved quickly once you noticed.
Write “FILED PURSUANT TO REV. PROC. 2013-30” at the top of Form 2553 and attach a signed statement explaining your reasonable cause and the corrective steps you took.9Internal Revenue Service. Instructions for Form 2553 If more than three years and 75 days have passed, you can still request a private letter ruling, which involves a separate application and a user fee.
What the IRS Sends Back
After reviewing the election, the IRS sends Notice CP261 confirming S corporation status and its effective date, usually within 60 days.12Internal Revenue Service. Understanding Your CP261 Notice Keep it permanently. Banks, lenders, and future IRS correspondence may ask for it. An incomplete form or an ineligible LLC gets a rejection notice instead.
Run Payroll and Pay Yourself a Reasonable Salary
Once the election takes effect, any member who works in the business must receive a salary the IRS considers reasonable for the work performed.13Internal Revenue Service. INFO 2003-0026 Skipping salary and taking everything as distributions to sidestep payroll taxes invites the IRS to reclassify those distributions as wages and assess back taxes, penalties, and interest.
In evaluating what counts as reasonable, the IRS weighs training and experience, duties and responsibilities, time devoted to the business, what comparable businesses pay for similar roles, the company’s distribution history, and compensation paid to non-owner employees.14Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
You will need a formal payroll process: withhold federal income tax, Social Security tax, and Medicare tax from each member-employee’s wages, deposit those withholdings with the IRS on schedule, and file Form 941 every quarter.15Internal Revenue Service. About Form 941, Employer’s Quarterly Federal Tax Return Most small S corporations hire a third-party payroll provider; costs typically run from a few hundred to a few thousand dollars a year.
Health Insurance for Owners Above 2 Percent
Health insurance premiums the S corporation pays for a member who owns more than 2 percent must be added to that member’s W-2 wages as taxable income subject to income tax withholding.14Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues Those premiums are not subject to Social Security or Medicare taxes, and the member-employee can then take an above-the-line self-employed health insurance deduction on the personal return, largely offsetting the added W-2 income. The S corporation has to be the entity paying or reimbursing the premiums, and the amount must show up on the shareholder’s W-2.
File Form 1120-S Each Year
An S corporation files Form 1120-S annually instead of the return it used before the election.16Internal Revenue Service. About Form 1120-S, U.S. Income Tax Return for an S Corporation The return is due March 15 for calendar-year entities, with a six-month extension available by filing Form 7004.17Internal Revenue Service. Publication 509 (2025), Tax Calendars The corporation itself generally owes no federal income tax; income, deductions, and credits pass through to members on Schedule K-1, which each member reports on a personal return.18Internal Revenue Service. Instructions for Form 1120-S
Late-filing penalties are steep. If the return is late or incomplete and no tax is due, the penalty is $255 per shareholder for each month (or partial month) the return is overdue, up to 12 months.18Internal Revenue Service. Instructions for Form 1120-S For a three-member LLC, that is $765 per month and can reach $9,180 over a full year. The penalty applies even when the company had no income.
Check Your State
The S corporation election is federal. Most states honor it for state income tax purposes automatically, but not all. Some require a separate state-level S corporation election form; a few do not recognize S status at all and tax the entity as a C corporation. Confirm with your state’s revenue department before filing.
Your LLC also still has to meet the state’s ongoing filing obligations, typically an annual or biennial report with a state-specific fee. Falling out of good standing does not directly revoke the federal S election, but it can create problems with banks, contracts, and your authority to do business.
Revoking the Election Later
If S status turns out to be a poor fit, members holding more than 50 percent of the ownership interests can revoke it by filing a statement with the IRS service center that handles your annual return.19Internal Revenue Service. Revoking a Subchapter S Election To make revocation effective January 1 of the current year, file by March 15. A later filing pushes revocation to the following tax year unless you specify a later effective date within the current year. After revocation, the company generally cannot re-elect S status for five tax years without IRS consent.