LLC or S Corp in New York: How to Decide Before the New Year
If you run your business as an LLC and someone has told you an S corporation could lower your tax bill, you’re not alone. It’s one of the questions we hear most from business owners in the fall, and it’s a fair one. For the right business, the S corp election saves real money every year. For the wrong one, it adds payroll, more paperwork and, in New York City, a tax you weren’t paying before.
Timing matters too. If you want S corp treatment to start on January 1, you need to run the numbers and make the decision in the next few weeks. Don’t panic. There is still time to do this properly. Here is how we help owners think it through.
First, LLC and S corp are not opposites
An LLC is a legal structure created under state law. An S corp is a tax election you make with the IRS. An LLC can elect to be taxed as an S corporation, so many of the owners we work with are both: an LLC on paper, taxed as an S corp.
By default, the IRS taxes a single-member LLC like a sole proprietorship and a multi-member LLC like a partnership. Either way, all of the profit flows to your personal return. It is subject to self-employment tax as well as income tax.
With the S corp election, the business pays you a salary through payroll, and payroll taxes apply to that salary. The rest of the profit passes through to you as a distribution, and distributions are not subject to self-employment tax. The savings come from that difference.
So the real question isn’t “LLC or S corp?” It’s “Will the S corp election save me more than it costs me?”
The two factors that drive the answer
Many considerations go into an S corp recommendation. Iryna points to two as the main ones: where the business is located, and what counts as reasonable compensation for the owner.
Reasonable compensation
The IRS expects an S corp owner who works in the business to pay themselves a reasonable salary for that work. You can’t pay yourself $10,000 and take everything else as distributions. If the salary is too low, the IRS can reclassify distributions as wages and charge back payroll taxes and penalties.
This is the number that makes or breaks the math. Iryna gives an example. Say your business earns $100,000 in profit and a reasonable salary for your role is $80,000. Only $20,000 avoids payroll tax, so the savings on that slice are small. The salary you pay yourself also lowers your qualified business income, which cuts your QBI deduction significantly. Add the cost of running payroll and filing a separate business return, and in this example the S corp doesn’t make sense.
That’s why the salary can’t be a guess. We use a special tool that looks at:
- the services you provide to the business
- how your time splits among those services
- your proficiency in each one
- your location
- the hours you work
The tool then uses Department of Labor data to assign an hourly rate to each service category and turns the total into an annual salary. The figure is based on data, and it’s documented if anyone ever asks how you arrived at it.
Location
Where your business operates can change the answer completely. We work with business owners across the United States, and state and local rules vary a lot. Some states tax S corporations at the entity level. Some cities don’t recognize the S corp election at all. New York is a clear example of both.
Why New York City changes the math
At the state level, New York generally requires a separate state election (Form CT-6) on top of the federal election before it treats your business as a New York S corporation. If you file only the federal election, your state treatment may not be what you expect.
The bigger issue is the city. New York City does not recognize the S corp election, and it has two business taxes that matter here.
The Unincorporated Business Tax (UBT) applies to unincorporated businesses, such as sole proprietors and LLCs taxed as partnerships or disregarded entities. It is a 4% tax on the business’s net profit. The city allows deductions, allowances and credits for smaller UBT businesses, though. As Iryna explains, a smaller business typically doesn’t owe UBT until its net profit reaches around $100,000.
Once your LLC elects S corp status, the city no longer treats it as unincorporated. Instead it pays the General Corporation Tax, at 8.85%. On the same $100,000 of profit, that’s $8,850.
Put those side by side. A New York City business with about $100,000 of profit could swap a city tax bill near zero for one close to $9,000, in return for modest payroll tax savings. That’s why we don’t recommend the S corp election for NYC businesses unless profit is well above the $100,000 mark.
A starting point: $150,000 in net profit
So where does the S corp start to make sense? Iryna’s rule of thumb:
“As a general rule, I would start exploring the opportunity at $150,000 and above in net profit before paying the owner.”
Iryna Stepanchuk, Founder, Certified Tax Strategist, CPA
“Before paying the owner” matters here. It means your business profit before any salary to yourself. If your business clears that level, the S corp is worth a serious look. If it doesn’t, the election usually costs more than it saves.
This threshold is where the analysis starts, not a final answer. In New York City, the General Corporation Tax raises the bar. In other locations, state rules may lower it or raise it. Your reasonable salary, your other income and your plans for the business all change the result.
When an S corp can backfire: uneven profits
The S corp works best when profit is steady and predictable. One of our clients shows why.
His net profit swung widely from year to year. Some years showed significant profits and others significant losses. Because of the S corporation rules, he still had to pay himself a reasonable salary in the loss years. So even when the business lost money, he still paid tax, in the form of payroll tax on that salary.
In his strong years, we used other strategies to reduce his taxes. The lesson for anyone weighing the election: look at your bad years as well as your good ones. If your income goes up and down a lot, the salary requirement can work against you in exactly the years you can least afford it.
The ongoing costs to plan for
The S corp election comes with obligations that an LLC taxed as a sole proprietorship or partnership doesn’t have. Before you decide, budget for:
- Payroll. You become an employee of your own company. That means withholding, payroll tax deposits and quarterly and annual filings. Many owners hand this to a payroll service so nothing gets missed.
- A separate business tax return. S corporations file Form 1120-S with the IRS, plus state returns, and in New York City a General Corporation Tax return.
- Changes to your estimated taxes. Withholding on your salary covers part of your tax, and distributions change what you owe on top of that. Your estimated tax payments should be recalculated once the S corp is running.
- Discipline with money. Salary goes through payroll on a schedule. Distributions should be planned, not pulled whenever the account looks full.
None of this is hard once it’s set up. It just has to be part of the comparison. Savings that disappear into payroll fees and extra filings aren’t savings.
Why decide before the new year
For a calendar-year business, the federal S corp election (Form 2553) is due no later than two months and 15 days after the start of the tax year, which is March 15. So why think about it now?
- Your 2026 numbers are the best guide. Your current-year profit, together with an honest look at next year, tells you whether you’re comfortably above the threshold or close to it.
- Payroll should start on time. If the election takes effect January 1, your reasonable salary should start early in the year, not get crammed into December.
- The salary analysis takes some work. Reviewing your services, time and location to set a salary you can defend is easier before the year starts.
- Year-end planning overlaps. Entity choice affects other moves you might make before December 31, which is why we treat it as part of broader tax planning rather than a single form.
If you’re starting a new business rather than changing an existing one, the same questions apply. Choosing the right structure from the beginning is much easier than unwinding the wrong one later.
A simple way to think it through
Before you talk to your CPA, write down your answers to these questions:
- What was your net profit this year before paying yourself, and what do you realistically expect next year?
- How steady is that profit from year to year?
- What work do you actually do in the business, and how many hours a week?
- Where does your business operate, and does your state or city tax S corporations differently?
- Are you prepared to run payroll and file an extra return every year?
If your profit is well above $150,000, steady and outside a city with an entity-level tax like New York’s, the S corp may be worth it. If your profit is near $100,000, uneven or based in New York City, the default LLC treatment is often the better choice for now.
If you’d like us to run the numbers for your business before January, our new entity setup and consulting services team will review your profit, set a reasonable salary with our compensation tool, and tell you clearly whether the election makes sense. We are looking forward to talking to you!
Frequently asked questions
Can my LLC become an S corp without forming a new company?
Yes. Your LLC stays the same legal entity and simply elects to be taxed as an S corporation by filing Form 2553 with the IRS. In New York, you generally also file a separate state election so the state treats you as an S corporation. Your business name, bank accounts and contracts can stay as they are.
How is a reasonable salary for an S corp owner determined?
It should reflect what the business would pay someone else to do the work you do. We use a tool that reviews the services you provide, how your time splits among them, your proficiency in each, your location and your hours. It then uses Department of Labor data to assign an hourly rate to each service and turns the total into an annual salary.
Does New York City recognize the S corp election?
No. New York City does not recognize S corporation status. An LLC that elects S corp treatment stops paying the city’s Unincorporated Business Tax and starts paying the General Corporation Tax instead. For businesses with profit around $100,000, that switch can raise the city tax bill significantly.
At what profit level does an S corp start to make sense?
As a general rule, we start exploring the S corp election at $150,000 or more in net profit before paying the owner. That is a starting point, not a guarantee. Your reasonable salary, location and how steady your profit is can push the answer either way, and in New York City the bar is higher.
What is the deadline to elect S corp status for next year?
For a calendar-year business, Form 2553 is due no later than two months and 15 days after the tax year begins, which is March 15. We recommend deciding before January 1, so payroll can start on time and your salary is set from the first month of the year.
