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An S Election That Actually Pays For Itself
The S-election can cut self-employment tax for a profitable business. It also adds payroll, a required salary and a separate return. We run your numbers first, then file.
S Corporation Formation For Michigan Businesses
An S corporation is less a different kind of business than a different way of being taxed. A Michigan corporation or an LLC formed in Michigan files Form 2553 with the IRS, and from then on profit passes through to the owners on K-1s, while owners who work in the business are paid a salary through payroll. The savings, when they exist, come from the self-employment tax you no longer pay on profit taken as distributions.
The catch is that the savings only show up above a certain level of steady profit, and the obligations start the day the election takes effect. So we look at your actual numbers, not a rule of thumb, before recommending it. It is part of our business formation services in Michigan, and the same team then runs your weekly or bi-weekly payroll and prepares the S corporation return on Form 1120-S.
What Electing S Status Commits You To
None of these are reasons to avoid the election. They are reasons to make it on purpose.
- A reasonable salary for every owner who works in the business, paid through payroll with withholding
- Quarterly Form 941 filings, year-end W-2s and Michigan withholding returns on that salary
- A separate federal return, Form 1120-S, with a K-1 issued to each shareholder
- Shareholder basis tracked every year, since it limits deductible losses and tax-free distributions
- Distributions kept in proportion to ownership, because an S corporation can have only one class of stock
- Ownership limited to eligible shareholders, which rules out partnerships and corporations as owners
- Books kept closely enough that salary, distributions and basis reconcile at year end
The Form 2553 Deadline Is Easy To Miss
For the election to apply to the current tax year, Form 2553 generally has to be filed no more than two months and 15 days after that year begins. For an existing calendar-year business, that lands on March 15. Every shareholder must consent to the election, which is far easier to arrange at formation than to chase later. Miss the window and the election usually waits a year, although the IRS does allow late-election relief in some situations.
Deciding, Forming And Electing In The Right Order
The election is one form. Getting the decision right around it is the real work.
Model The Salary And The Savings
We estimate a reasonable salary for your role and compare the payroll taxes on it with the self-employment tax you pay today, counting the added work of payroll and a second return.
Form The Entity Or Keep The One You Have
A new business files with the State of Michigan first. An existing LLC can usually keep its entity and simply elect S treatment, with no new state filing.
File Form 2553 On Time
Every shareholder signs, we file within the deadline and keep the IRS acceptance letter with your permanent records.
Start Payroll Before The First Distribution
Your salary runs through Gusto, ADP or QuickBooks Payroll from the start, so wages are in place before owners begin taking distributions.
S Corporation Questions Worth Asking First
Is an S corporation always better than an LLC?
No. An S corporation is a tax election, and plenty of LLCs are better off without it. When profit is modest or uneven, the payroll, the salary requirement and the separate return can outweigh the self-employment tax saved. We compare both paths with your numbers before you commit.
What counts as a reasonable salary?
Roughly what the business would have to pay someone else to do the work you do. The IRS looks at your duties, your time and experience, and what similar roles pay. A salary set too low to stretch the savings is a known issue the IRS watches for, so we document how the number was reached.
Can my existing LLC become an S corporation?
Usually, yes. An eligible LLC can elect to be taxed as an S corporation by filing Form 2553, and it stays an LLC under Michigan law. With more than one member, the operating agreement and how distributions are made need a look first, since an S corporation has to distribute in proportion to ownership.
Other Setups To Weigh Against The S Election
The simpler starting point for many owner-operated businesses, with the S election kept in reserve until profit supports it.
LLC formation in detail C-Corporation FormationFor businesses bringing in investors, issuing more than one class of stock or reinvesting most of their profit.
C-Corporation formation in detail EIN / Federal Tax ID ApplicationThe federal tax ID your payroll, Form 941 filings and Form 1120-S all run under, obtained and recorded correctly.
EIN and federal tax ID application in detail Business Formation & Registration OverviewLLC, S-Corp and C-Corp formation, EINs, DBAs and Michigan annual reports on one overview page.
Return to Business Formation & RegistrationFind Out If The Election Is Worth It
Bring last year's return and a sense of this year's profit. We will show you what the S-election saves, what it adds and whether now is the time.