Should Your LLC Elect S Corp Status? The Pros, the Cons, and the Payroll Trap That Could Save You Thousands

💼 Should Your LLC Elect S Corp Status? The Pros, the Cons, and the Payroll Trap That Could Save You Thousands

You’re starting (or already running) a small business in Texas. You’ve formed an LLC, you’re earning money, and now you’re hearing about S Corp elections and “FICA savings” from every corner of the internet.

Here’s the deal: electing S Corp status can legally lower your taxes—but it also comes with added responsibilities, payroll requirements, and IRS scrutiny.

This guide walks through:

• The pros and cons of using an LLC

• The pros and cons of electing S Corp status

• A FICA tax example that shows real-world savings

• The key steps to get set up properly

🧾 Step 1: Forming an LLC in Texas

An LLC (Limited Liability Company) is the most common legal entity for small business owners in Texas.

✅ Pros of an LLC

• Limited liability for owners (your personal assets are protected)

• Simple, flexible setup

• Pass-through taxation (no entity-level income tax)

• Easy to manage (no corporate formalities)

• Can have one or multiple owners (members)

❌ Cons of an LLC

• All net income is subject to self-employment tax (FICA)

• Less favorable for raising venture capital

• Can become costly if not structured properly

🔄 Step 2: Electing S Corporation Status

An LLC can elect to be taxed as an S Corp by filing IRS Form 2553—without changing the legal structure of your business.

✅ Pros of S Corp Election

• FICA (self-employment) tax savings
  You only pay Social Security and Medicare tax (15.3%) on your reasonable salary—not on all your net profit.

• Still maintains pass-through taxation

• No double taxation like a C Corp

❌ Cons of S Corp Election

• Must pay yourself a reasonable salary (requires payroll system)

• Higher administrative burden (quarterly filings, W-2s)

• Must file separate S Corp tax return (Form 1120-S)

• Increased IRS scrutiny

• Can’t have more than 100 shareholders or non-US owners

💡 Real-World Example: FICA Tax Savings with an S Corp

Scenario:
You make $120,000/year in net profit from your LLC.

If you’re taxed as a standard LLC:

• All $120,000 is subject to 15.3% self-employment tax

• That’s $18,360 in FICA taxes

If you elect S Corp and pay yourself a reasonable salary of $60,000 (as an example, but check with your CPA for your situation):

• Only the $60,000 salary is subject to 15.3% payroll tax = $9,180

• The remaining $60,000 is considered a distribution, not subject to FICA

• Total FICA tax: $9,180 → You save $9,180

BUT…

You’ll need to pay:

• A payroll provider (e.g., Gusto, ADP, Patriot, etc.) ~ $250–$1,000+/year

• Your CPA to file Form 1120-S

• Possibly state unemployment tax and worker’s comp

Net savings: Still significant—but you must stay compliant.

⚙️ Steps to Form an LLC and Elect S Corp Status

1. Form the LLC

   • File with the Texas Secretary of State

   • Choose your business name

   • Appoint a registered agent

2. Create an Operating Agreement

   • Especially important for multi-member LLCs

   • Outlines structure, roles, and ownership

3. Get an EIN (Employer Identification Number)

   • Free from the IRS website

4. Elect S Corp Status with the IRS

   • File Form 2553 (deadline: within 75 days of formation or calendar year)

   • Consider using a CPA to ensure accuracy

5. Set Up Payroll

   • Use a payroll platform to pay yourself and remit payroll taxes

   • File quarterly 941s and year-end W-2s

   • Consider enrolling in EFTPS for tax deposits

6. Determine “Reasonable Salary” with a CPA

   • Based on industry, experience, and services provided

   • Too low = IRS audit risk

   • Too high = kills the tax benefit

📉 When NOT to Elect S Corp

You might want to wait or avoid S Corp status if:

• Your net income is under $40,000/year (as an example, but check with your CPA for your situation):

• You’re not ready to run payroll or file extra returns

• You plan to reinvest all profits back into the business

• You don’t yet have a CPA or payroll partner

🧠 Pro Tip: Let Your CPA Help You Time the Election

Many business owners:

• Start as an LLC for simplicity

• Elect S Corp once income passes $50k–$80k/year (as an example, but check with your CPA for your situation):

• Save thousands without risking penalties

✅ Final Thoughts

Forming an LLC is a great move. Electing S Corp status can be even better—if you’re ready for the responsibility that comes with payroll, compliance, and recordkeeping.

Done right, this combo can protect your personal assets AND cut your tax bill—a true win-win for small business owners in Texas.

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⚠️ Disclaimer:

This blog is for informational purposes only and does not constitute legal, tax, or accounting advice. Reading this blog does not create an attorney-client relationship. Please consult a licensed CPA or attorney in your jurisdiction before taking action.