Can an LLC be Taxed as an S Corp

Yes, it can. An LLC can be taxed as an S Corp, assuming it qualifies for S Corp taxation status. An LLC can also be taxed as a C Corporation for that matter. This makes an LLC a very flexible business type.

Option 1: LLC electing to be treated as a Corporation

A. Single Owner LLC:

If the LLC has only one owner, the IRS will automatically treat the LLC as if it were a sole proprietorship (a disregarded entity), unless an election is made for it to be treated as a corporation. An LLC may elect corporate tax treatment using IRS Form 8832 (Form 8832, Entity Classification Election).

B. LLC Owned by More than One Person:

If the LLC has two or more owners, the IRS will automatically treat the LLC as if it were a partnership unless an election is made for it to be treated as a corporation. An LLC may elect corporate tax treatment using IRS Form 8832 (Form 8832, Entity Classification Election).

Option 2: LLC electing to be treated as an S Corp

An LLC may elect S Corp tax treatment by filing IRS Form 2553 (Form 2553 Election by a Small Business Corporation). However, sometimes the LLC must file both Form 8832 (see Option 1 above) and Form 2553.

To determine whether your LLC can file Form 2553 alone, or whether Form 8832 must also be filed, see page 1 of the Instructions to form 2553 or talk with an LLC attorney in your state.

Tips for an LLC Taxed as an S Corp:

Electing to have your LLC taxed as an S Corporation involves a couple procedural changes in paying and filing your taxes.

1. Quarterly Filings for an LLC Taxed as an S Corp

Keep in mind that if your business is treated as an S Corp, it must pay estimated taxes. But this inconvenience is often offset by the tax benefit of an S Corp (self-employment tax savings).

2. Income Taxes at the End of the Year

Also, an S Corp must file different income tax forms at the end of the year.

Shareholder-employees will receive two tax documents from the S-Corporation at the end of the year: a W-2 wage statement (income as an employee) and a Schedule K-1 statement.

3. No Self-Employment Tax for an S Corp Owner-Employee

Shareholder-employees of an S-Corp (including an LLC taxed as an S Corp) do not pay Self-Employment Tax because their wages are reported on a W-2, with Social Security and Medicare taxes already withheld. By contrast, the owner of an LLC that is taxed as a partnership or sole proprietorship (not an S Corp) does pay Self-Employment Tax. Self-Employment Tax is figured at the end of the year on Schedule SE via Form 1040.

© 2012, Bruce Mc. All rights reserved.