S-Corp Election

An S-Corp election is a tax status designation made by filing IRS Form 2553 that allows an LLC or corporation to be taxed under Subchapter S of the Internal Revenue Code, enabling the business to pass income, losses, deductions, and credits through to shareholders while avoiding double taxation at the corporate level. The primary financial benefit of S-Corp election for owner-operators is the reduction of self-employment tax (currently 15.3% on the first $168,600 of earnings in 2026) by splitting business income into two components: a reasonable salary (subject to FICA/Medicare taxes) and distributions (not subject to self-employment tax). For a single-member LLC earning $150,000 in net profit, electing S-Corp status and paying a reasonable salary of $80,000 can save approximately $10,710 in annual self-employment tax on the $70,000 distributed as profit. However, S-Corp election introduces compliance costs — payroll processing ($500–$2,000/year), additional tax return preparation (Form 1120-S, $1,000–$3,000), and strict reasonable compensation requirements enforced by the IRS. The break-even point where S-Corp tax savings exceed compliance costs typically falls between $50,000 and $80,000 in annual net business income, depending on industry, geography, and the owner's reasonable salary benchmark. doola provides end-to-end S-Corp election services including Form 2553 preparation, payroll setup, reasonable compensation analysis, and ongoing Form 1120-S filing to ensure founders capture maximum tax savings without compliance risk.