When should a Virginia LLC elect to be taxed as an S-Corp?

The short answer is when your net profit consistently lands above $50,000 to $80,000 per year. At that point, the self-employment tax savings from S-Corp election usually outweigh the additional costs that come with it.

Here’s why. As a default single-member LLC, all of your net profit is subject to self-employment tax at 15.3% (covering both Social Security and Medicare). That means on $120,000 of net profit, you’re paying roughly $18,000 in SE tax alone, on top of income tax. With an S-Corp election, you pay yourself a reasonable salary and take the remaining profit as distributions. Only the salary gets hit with payroll taxes. The distributions don’t. If your reasonable salary is $60,000 and you take $60,000 in distributions, you just saved around $9,000 in self-employment tax.

The key phrase there is “reasonable salary.” The IRS requires that S-Corp owners who work in the business pay themselves a salary that reflects what someone in that role would earn. You can’t pay yourself $20,000 and take $100,000 in distributions. That’s a red flag that invites scrutiny.

To make the election, you file IRS Form 2553. The deadline is within 75 days of forming the LLC, or by March 15 if you want the election to apply for the current tax year. Miss those windows and you’re waiting until next year. Virginia follows federal S-Corp treatment automatically, so there’s no separate state election to worry about.

What changes once you elect S-Corp status is significant. You need to run payroll every pay period, make payroll tax deposits, file quarterly payroll returns, file Form 1120-S (the S-Corp tax return) annually, and issue K-1s to all owners. That’s more bookkeeping, more compliance, and more cost. Payroll processing, a more complex tax return, and the tax strategy work to get the salary and distribution split right all add to your annual overhead. If your net profit is $40,000, those added costs could eat up most or all of what you’d save on self-employment tax.

The breakeven point depends on your specific situation. Business owners with steady, predictable profit above that $50,000 to $80,000 range almost always benefit. If your income swings wildly from year to year, the math gets less clear. And if you’re reinvesting most of your profit back into the business rather than taking draws, the savings shrink because there’s less to distribute.

One thing to keep in mind is that this decision doesn’t have to be permanent. You can revoke S-Corp status if it stops making sense, though there are rules around how soon you can re-elect afterward. The smarter move is to get the analysis done before you file so you know where you stand. Working with bookkeepers in Fairfax who understand entity structure and can run the numbers for your specific profit level takes the guesswork out of the decision. The goal is to make sure you’re not paying more in compliance costs than you’re saving in taxes.