Quick answer: An S corp is not a type of business. It is a tax status you choose with the IRS. Your LLC or corporation keeps its legal form, but its profit “passes through” to your personal return, and you can split your pay into a salary and distributions. Only the salary carries Social Security and Medicare tax, which is how most owners save money.
If you just formed a business, someone has probably told you to “become an S corp.” This guide explains what that means in everyday language, with real numbers, so you can decide with confidence.
What is an S corp?
An S corporation, or S corp, is a business that has elected to be taxed under Subchapter S of the Internal Revenue Code. That is where the “S” comes from.
Three things make an S corp different:
- It is a tax choice, not a company type. You first form an LLC or corporation, then file Form 2553 to be taxed as an S corp.
- Profit passes through. The business generally pays no federal income tax. Profit shows up on each owner’s personal return.
- Owners who work in the business are employees. You pay yourself a salary through payroll and can take the remaining profit as distributions.
How an S corp works, in plain English
Think of your S corp as a pipe. Money comes in, expenses go out, and whatever profit is left flows through to you. Along the way, you decide how much of that profit is paid as salary.
Two points confuse almost every new owner:
- You are taxed on profit, not on what you withdraw. If the business earns $45,000 after your salary and you leave it all in the bank, you still pay income tax on $45,000.
- Distributions are not a second paycheck with no tax. They skip Social Security and Medicare, but income tax still applies through your K-1.
At year end the S corp files Form 1120-S and gives each owner a Schedule K-1. Not sure what that form is? Read what a K-1 is and how to use it.
S corp vs LLC, sole proprietor and C corp
Short version: An LLC is a legal structure. An S corp is a tax election. So the real comparison is an LLC taxed the default way versus an LLC taxed as an S corp. A C corp is taxed twice: once by the company and again when owners receive dividends.
| Sole proprietor | LLC (default tax) | LLC or corp taxed as S corp | C corp | |
|---|---|---|---|---|
| How you set it up | Nothing to file | File with the Virginia SCC | Form an LLC or corp, then file Form 2553 | Incorporate with the Virginia SCC |
| Personal liability protection | No | Yes | Yes | Yes |
| Who pays income tax | Owner | Owners | Owners | Company at 21%, then owners on dividends |
| Social Security and Medicare | On all profit | On all profit | Only on owner salary | Only on salary |
| Payroll for owners | No | No | Required | Required |
| Extra tax return | No | Form 1065 if 2+ owners | Form 1120-S | Form 1120 |
| Often best for | Testing an idea | New or lower profit businesses | Steady profit, owner works in business | Raising investor money |
How much can an S corp save you?
As a sole proprietor or default LLC, you pay self employment tax of 15.3% on nearly all of your profit. As an S corp, the combined 15.3% applies only to your salary, with the company typically paying 7.65% and you paying 7.65%.
The chart below compares both at different profit levels, after adding about $2,000 a year for the extra payroll and tax return work.
- Below about $50,000 of profit, an S corp usually costs more than it saves.
- Around $60,000 to $80,000, savings start to cover the extra costs.
- At $100,000 and up, savings of several thousand dollars a year are common.
Good to know: The pass through deduction (often called QBI) was made permanent in 2025. It can still let eligible owners deduct up to 20% of business profit, but it is figured on profit after your salary, so it is worth modeling both ways before you elect.
Want a quick look at your own self employment tax? Try our free self employment tax calculator.
What is a reasonable salary?
Quick answer: A reasonable salary is what your business would have to pay someone else to do the work you do. The IRS does not publish a percentage, and the so called 60/40 rule is not an official rule.
The IRS looks at factors like these:
- Your training, experience and the hours you work
- Your duties and responsibilities
- What similar businesses pay for similar work in your area
- What the business can afford and how much it earns
- What you pay other employees
Tip: Keep a short note in your files explaining how you set your salary, such as a printout of local pay data for your role. If the IRS ever asks, you will have an answer ready.
Your salary also affects retirement savings. Solo 401(k) employer contributions are based on your W-2 pay, so a very low salary can limit how much you put away. Read more in how to pay yourself as a business owner.
Who can be an S corp? The requirements
- A domestic corporation or LLC formed in the United States
- No more than 100 shareholders (family members can count as one)
- Shareholders are individuals, certain trusts and estates, or certain tax exempt organizations
- No partnerships, corporations or nonresident aliens as owners
- Only one class of stock, so profit must be distributed in proportion to ownership
- Not an ineligible business, such as certain banks and insurance companies
Most small businesses owned by U.S. citizens or green card holders qualify easily.
S corp pros and cons
Pros
- Lower Social Security and Medicare tax on profit above your salary
- One layer of income tax, unlike a C corp
- Liability protection from your LLC or corporation
- Losses can pass through to your personal return (up to your investment in the business)
- A formal payroll record that helps when applying for a mortgage or loan
Cons
- You must run payroll and file quarterly payroll reports
- A separate business tax return every year
- More detailed bookkeeping
- The IRS reviews owner salaries, so underpaying yourself is risky
- Ownership limits make it a poor fit for raising investor money
- Health insurance and some fringe benefits are handled differently for owners
When should you become an S corp?
An S corp tends to make sense when most of these are true:
- Your profit after expenses is steady, often above $50,000 to $60,000 a year
- You can pay yourself a fair salary without straining cash flow
- You work in the business, rather than just owning it
- You do not plan to raise venture capital or bring in foreign or corporate owners
- You are ready for monthly bookkeeping and payroll
It is usually too early if your business is brand new with uncertain income, if you have losses, or if your profit is mostly from rental real estate.
→Related guideStill deciding? Compare LLC vs S corp side by sideSee when the switch pays off and the costs owners often forget.How to become an S corp in Virginia, step by step
- Form your business. Register an LLC or corporation with the Virginia State Corporation Commission. An LLC costs $100 to form and $50 a year.
- Get an EIN. Apply free on the IRS website. It takes a few minutes.
- Run the numbers. Compare your taxes with and without the election using a reasonable salary.
- File Form 2553. It is due within 2 months and 15 days of the start of the tax year you want it to apply. For an existing calendar year business, that is March 15.
- Set up payroll. Register with Virginia Tax for withholding and the Virginia Employment Commission for unemployment tax.
- Separate your books. Track salary, distributions and owner expenses in their own accounts.
Prefer to hand it off? Our S corp election service covers the projection, the filing and payroll setup.
What does it cost to run an S corp?
| Added cost | What it covers |
|---|---|
| Payroll service | Paychecks, tax deposits, quarterly Forms 941 and Virginia reports, year end W-2s |
| Business tax return | Form 1120-S, owner K-1s and Virginia Form 502 |
| Unemployment taxes | Federal (Form 940) and Virginia unemployment tax on the first part of your salary |
| Bookkeeping | Monthly books clean enough to support salary, distributions and the return |
Many small S corps spend roughly $1,500 to $3,000 more per year than a default LLC. That is why the savings need to be large enough to cover it.
Your S corp year at a glance
- Every paydayRun payroll for the owner, withhold taxes and make federal and Virginia deposits on schedule.
- January 15Fourth quarter personal estimated tax payment, if you make them.
- January 31W-2s to the owner and employees, 1099-NEC to contractors, Forms 941 and 940, and the Virginia VA-6 annual withholding report.
- March 15Form 1120-S and owner K-1s are due (or extend to September 15). Also the Form 2553 deadline for an election that starts this year.
- April 15Personal returns, Virginia Form 502 for the S corp and the first quarter estimated tax payment.
- April 30, July 31, October 31Quarterly Form 941 and Virginia Employment Commission unemployment reports.
- June 15, September 15Second and third quarter estimated tax payments.
S corp taxes in Virginia
- No separate state election. Virginia follows your federal S corp status.
- Annual return. The S corp files Virginia Form 502, due April 15 for calendar year businesses. Owners report their share on their own Virginia returns.
- Out of state owners. The S corp may need to withhold Virginia tax for nonresident owners.
- Optional pass through entity tax. Some owners can save federal tax by having the S corp pay Virginia tax at the entity level. Learn how in our Virginia PTET guide.
- Local taxes still apply. Business license (BPOL) and business property taxes depend on your county. See Loudoun and Fairfax business taxes.
Common S corp mistakes new owners make
- Taking no salary. Paying yourself only distributions is the fastest way to draw IRS attention.
- Missing the Form 2553 deadline. It is common and often fixable. Our Form 2553 guide explains late relief.
- Uneven distributions between owners. Distributions must match ownership percentages or you risk the election.
- Mixing personal and business spending. It muddies your books and your basis.
- Paying owner health insurance the wrong way. For owners with more than 2%, premiums must be added to the W-2 to stay deductible.
- Electing too early. If profit is low or uncertain, the extra costs can outweigh the savings.
S corp FAQs
What does S corp stand for?
The “S” refers to Subchapter S of Chapter 1 of the Internal Revenue Code, the part of the tax law that lets a small business corporation pass its income through to its owners.
Is an S corp the same as an LLC?
No. An LLC is a legal entity you form with your state. An S corp is a federal tax status. An LLC can elect to be taxed as an S corp and still be an LLC legally.
Can a single member LLC be an S corp?
Yes. A one owner LLC can file Form 2553 and be taxed as an S corporation. The owner then becomes an employee of the business and is paid through payroll.
Do S corps pay income tax?
Usually not at the federal level. Profit passes through to the owners, who pay tax on their personal returns. In Virginia the S corp also generally pays no entity level income tax unless it opts into the pass through entity tax.
What is the S corp tax rate?
There is no separate S corp rate. Profit is taxed at each owner’s personal rate, from 10% to 37% federally and up to 5.75% in Virginia. Only the owner’s salary carries Social Security and Medicare tax, generally 15.3% combined: 7.65% paid by the company and 7.65% paid by the owner.
How much should I pay myself from my S corp?
Pay yourself a reasonable salary, close to what you would pay someone else to do your job in your area. There is no official percentage. Take the rest of the profit as distributions.
At what income does an S corp make sense?
Many owners start to benefit once steady profit is above roughly $50,000 to $60,000 a year after expenses. Below that, payroll and tax prep costs often cancel out the savings.
Can I be an S corp with no employees?
Yes. If you work in the business, you are the employee. Many S corps are one person companies that run payroll only for the owner.
Can my spouse and I own an S corp together?
Yes. Spouses can both be shareholders, and each must sign the shareholder consent on Form 2553. Family members can even count as one shareholder toward the 100 shareholder limit.
Am I taxed on money I leave in the S corp?
Yes. You pay tax on your share of the profit shown on your K-1, whether or not you take it out of the business. Distributions themselves are generally not taxed again.
How do I stop being an S corp?
Shareholders owning more than half the stock sign a revocation statement and send it to the IRS. After revoking, you generally must wait five years before electing S status again.
Get a clear answer for your business
Our Ashburn team helps owners across Northern Virginia decide whether an S corp makes sense, file the election and keep payroll and books on track. Learn about our S corp election, payroll and business tax services.
This article is general information and not tax advice for your situation. Tax rules change, so talk with a qualified professional before making decisions.
