When should a founder convert an LLC to an S-corp?
The S-corp election saves self-employment tax — but only if your profit is high enough, your payroll is set up, and your state doesn't claw the savings back.
The rough rule of thumb: if your single-member LLC is consistently clearing more than about $80,000 in net profit, the S-corp election starts to pay for itself. Below that, the payroll cost and the tax-prep cost typically eat the savings.
The mechanics. As an S-corp, you pay yourself a reasonable salary (subject to payroll tax), and take the remainder as a distribution (not subject to self-employment tax). The savings are real — but they depend on how aggressively you set the salary, and how defensible that number is.
California complicates this. The state imposes a 1.5% franchise tax on S-corp net income, with an $800 minimum. For many California owners, this trims the savings by a third or more. Still worth doing in most cases, but the math needs to be done.
The election itself is a Form 2553, due by March 15 of the year you want the election to take effect — or within 75 days of forming the entity. Late elections are possible under Rev. Proc. 2013-30, but we try to avoid relying on it.