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For example, let’s say I file form 2553 in February to elect S Corp status for my LLC with a retroactive start date of January 1 of the same year. The IRS may take two months to review form 2553, and therefore the LLC may not be approved for S Corp election until April.

So, how do I pay myself during January through April? Do I continue paying myself distributions, and then somehow convert these distributions to reasonable salary once the S Corp election is approved? Or, do I start payroll now, and behave as an S Corp with the assumption that the IRS will approve form 2553 in just a couple months?

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S-corporation status is about taxation, not about payroll. If you pay employees, including yourself, the expense is deductible to the corporation. In a C corporation that reduces the taxes that the corporation owes. In an S corporation it reduces the net income that you have to report. Do what makes sense for your business.

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  • Thank you. Therefore, will it be alright to pay myself and employees a salary (reported on W-2), and also take distributions (reported on K-1), even before the LLC has officially been approved for S Corp taxation? Since the LLC is currently a sole prop, I have been reporting distributions on a Schedule C at the end of the year.
    – Leo Galleguillos
    Feb 14, 2022 at 8:06

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