Should you elect S-corp status for your California LLC?
How the S-corp election works, when it actually saves tax, and the California-specific rules to watch out for. A practical walkthrough for LLC owners.
The S-corp election (IRS Form 2553) is one of the most powerful tax moves available to a profitable California LLC. It's also one of the most misunderstood.
The core idea
As an LLC taxed as a sole proprietorship, every dollar of net profit is subject to self-employment tax (~15.3%). As an S-corp, only the salary you pay yourself is subject to payroll taxes; the rest flows through as distribution income. That difference — done right — can save $8,000–$20,000 a year for many owners.
The catch: reasonable compensation
The IRS requires S-corp owner-employees to pay themselves 'reasonable compensation' — a salary in line with what someone else would earn doing the same job. Set it too low and you invite an audit and back-payroll-tax bill.
California adjustments
California doesn't recognize S-corp status the way the federal government does — the state imposes a 1.5% franchise tax on S-corp net income (minimum $800). We model both the federal savings and the California cost before we recommend the election.
When it's a mistake
If your net profit is below roughly $50k–$70k, the additional payroll, tax-prep, and California cost usually eats the savings. Wait until the math works — we'll run it for free.