Can my single-member LLC switch to an S corporation to avoid self-employment tax?

Can my single-member LLC switch to an S corporation to avoid self-employment tax?

by Joseph A. Pancerella, CPA | Oct 20, 2017

As I have a single-member LLC, can I switch to an S corporation to avoid self-employment tax retroactively for 2017? I am not sure how the taxation works for a single-member LLC, but was told that it has an additional self-employment tax compared with an S corp. If it makes sense to do so, how much does it cost to switch?

First, you cannot avoid self-employment tax completely by switching to an S corporation. You must still pay reasonable compensation to yourself, and those wages would be subject to self-employment tax. However, profits generated by the S corporation would not be subject to self-employment tax.
It may be possible to elect S status retroactive to Jan. 1, 2017, as there are IRS procedures that allow such an election. However, not enough information has been provided in your question to answer in more detail, so it is best to consult a professional so that a determination can be made.
As far as cost goes, that depends on the complexity. In most cases, it a single, three-page form is completed, so the cost of the S election is usually nominal and should not enter the decision-making process.
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Answered by: Joseph A. Pancerella, CPA, is managing director of Pancerella & Associates LLC in Reading, Pa.
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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