The Complete S Corp Formation Checklist for Businesses-of-One

FAQs

• How much can I save on self-employment taxes by electing S corp status?

  Lettuce customers save $15,000 on average. If you're a business-of-one making over $100k, you could be overpaying your taxes by as much as $10,000. Converting your LLC to an S Corp lets you be both the owner of your company and its sole employee. This means you pay yourself a salary as an employee, and also collect profit as an owner. Those profits aren't subject to self-employment tax, saving you thousands.

• What's the difference between salary and distributions, and how are they taxed?

  As the owner of an S Corp, you pay yourself two ways—and it's key for maximizing tax benefits: Reasonable salary: A salary in an S Corporation is subject to payroll taxes, such as Social Security and Medicare, and the IRS mandates that it be "reasonable," based on industry standards and the company's performance. Distributions: This is profit you take from the business beyond a salary and isn't subject to payroll taxes.

• Do I need separate business bank accounts and formal payroll?

  S Corps are required to run official payroll for your salary, even if you're the only employee. Lettuce automates it for you. Lettuce keeps detailed records of your payroll and distribution decisions, ensuring you're prepared if the IRS comes knocking... Lettuce helps you keep business finances separate, ensuring you don't unintentionally mix personal and business expenses by automatically setting you up with a free business bank account for all your business transactions, including a debit card, depositing invoices, running payroll, and making tax payments.

• Should I form an LLC first and then elect S corp status, or incorporate directly as an S corp?

  When thinking about your business, you don't have to choose between an LLC and S Corp. You can (and probably should) have both! You can organize your business as an LLC and designate it as an S-corp for tax purposes. What Exactly is an S Corp? We’ve Got the Answer You can enjoy all the legal protections that come with an LLC. But at a certain income level, you'll be missing out on some significant tax advantages without the S Corp.

• What paperwork do I need to file with the IRS (Form 2553) and when?

  It takes about five minutes to provide Lettuce with all of the information that is needed to set up your business as an LLC, file your S Corp Election, and open your business bank account. From there, Lettuce handles all of the paperwork and set up on your behalf. Learn more about Form 2553.
  

• At what income level does S corp election actually save money after considering additional costs?

  Generally, it's time to consider S Corp status when your business consistently generates at least $60,000 in annual profits. However, the potential savings become even more significant as your profits reach $80,000 or more, making it essential to evaluate your financial trajectory. At this profit level, the savings from an S Corp typically outweigh the extra costs of maintaining it (like running payroll and filing separate tax returns).

• What happens if I forget to pay myself a salary or miss payroll tax deadlines?

  Neglecting a Salary: If your S Corp is profitable and you're not taking any salary, it can trigger IRS concerns. Say goodbye to tax day dread. Lettuce will make sure you never miss a deadline again.

• When should I make the S corp election - at formation or after my business grows?

  The key to deciding when to switch to an S Corp isn't necessarily about the time of year but your profits. You can convert to an S Corp any time of the year. Starting at the beginning of the year might make bookkeeping easier, but you can convert to an S Corp mid-year and still score tax benefits.
  1. Standard election can be made by March 15th under the standard calendar tax year. 
  2. Late election can be made anytime later in the year through filing late election relief alongside the standard S Corp election form. Doing so elects mid-year, meaning you'd see a partial year of tax savings from this.
  3. If you have an existing LLC or legal business entity, however, the S Corp election can be backdated to the beginning of the year to recover some tax savings. 
  So if just starting out, and not quite sure about the S Corp yet, we still encourage forming your LLC/legal entity now so you're protected from liability, and so the S Corp election could be backdated should you choose to later.

• Can I switch back to sole proprietorship or regular LLC taxation later?

  Two options here:
  1.  Revoke an S Election : Must be done by March 15th of the standard tax year for it to take affect in the current year. Allows one to reverse the S Corp election for their business entity, while keeping the same underlying legal entity (e.g. LLC active). Helpful if you want to keep your same business entity in place. If doing this, one cannot re-elect S Corp status for that business for 5 years thereafter. Additionally if the revocation is done after 3/15, the S Corp will still be active for the current tax year and require compliance + corporate tax filing at year end.
  2. Dissolve the business entirely - this allows you to fully close the business entity and related tax status at any point in the year. The process varies by state.