Do I Need an S-Corp? How to Tell If the Election Saves You Money

What an S-Corp actually is

"S corporation" isn’t a type of company you form with the state. It’s a tax status you choose with the IRS by filing Form 2553. Your business can be a corporation or an LLC; the S election only changes how the IRS taxes it. Your Connecticut LLC stays an LLC, with the same liability protection and the same $80 annual report.

To qualify, the business must be a domestic entity with no more than 100 shareholders, only allowable shareholders (generally individuals, certain trusts and estates, and no nonresident aliens, partnerships or corporations), and only one class of stock.

Where the savings come from

As a sole proprietor or single-member LLC, you pay self-employment tax of 15.3% on 92.35% of all your net profit, on top of income tax. The Social Security part (12.4%) applies up to the wage base, which is $184,500 for 2026, and the 2.9% Medicare part has no cap.

With an S-Corp, you become an employee of your own company. You pay yourself a salary through payroll, and Social Security and Medicare taxes (7.65% from you and 7.65% from the company) apply to that salary. The rest of the profit can come to you as a distribution, which isn’t subject to those payroll taxes. Income tax still applies to all of it.

What it costs to run an S-Corp

• Reasonable salary. The IRS requires an S-Corp to pay owner-employees reasonable compensation for their work before taking distributions. It looks at your duties, time, experience and what comparable businesses pay. Paying yourself too little to save tax is the most common S-Corp mistake, and the IRS can reclassify distributions as wages.
• Payroll. You’ll run real payroll, file quarterly Forms 941 and an annual Form 940, issue yourself a W-2, and file Connecticut withholding (CT-941, CT-W3), unemployment (UC-2) and CT Paid Leave reports. A payroll service handles most of this. Estimate the full cost with our payroll cost calculator.
• A separate business return. The S-Corp files Form 1120-S by March 15 and gives you a K-1, and Connecticut requires Form CT-1065/CT-1120SI. Expect higher tax preparation fees than for a Schedule C.
• Health insurance rules. If you own more than 2%, health premiums the S-Corp pays for you go in Box 1 of your W-2 to keep the self-employed health insurance deduction. See our self-employed health insurance guide.
• Cleaner books. Mixing personal and business money, or taking money out with no record, creates real problems in an S-Corp. Good bookkeeping isn’t optional.

When an S-Corp usually makes sense

There’s no single income number where everyone should switch. It depends on the gap between your profit and a reasonable salary for your work, and on how much the extra payroll, accounting and state filings cost you. In general, the election starts to pay off when:

• Your profit is steady and comfortably higher than a reasonable salary for what you do.
• You expect that to continue for at least a couple of years, since switching back has its own rules.
• You’re ready to run payroll on time and keep clean books.

It usually isn’t worth it yet if your profit is small or uneven, if nearly all of it would need to be paid as salary anyway, or if you’re still figuring out whether the business will last. Other tax effects matter too, including the qualified business income deduction and retirement contribution limits, so look at the whole picture before deciding.

How to elect S-Corp status, and the deadline

1. Form your LLC or corporation first. See how to start an LLC in Connecticut.
2. Get an EIN if you don’t have one.
3. File IRS Form 2553, signed by all shareholders. An LLC can file Form 2553 directly to be treated as a corporation that elects S status.
4. File on time: no more than 2 months and 15 days after the start of the tax year the election should take effect, or any time during the year before. For calendar year 2027, the deadline is March 15, 2027. If you miss it, the election generally starts the following year unless you qualify for late-election relief.
5. Set up payroll before your first owner paycheck.

Find every related date on our tax deadline calendar.

Connecticut details

• Connecticut follows your federal S election. The S-Corp files Form CT-1065/CT-1120SI, due the 15th day of the third month after year end (March 15 for calendar-year businesses).
• The Connecticut pass-through entity tax is optional for tax years starting in 2024 or later. You elect it each year on a timely filed CT-1065/CT-1120SI, and the election can’t be undone for that year. Whether it helps depends on your situation.
• You’re an employee of your own S-Corp, so Connecticut payroll registrations (DRS withholding, CT DOL unemployment, CT Paid Leave) apply.