Now accepting new clients!

What is an S Corp Conversion, and is it right for me?

Are you a small business owner, making more than $30,000 a year in profit? You may consider converting your business from an LLC to an S Corp. For many business owners, the tax savings can be significant. However, it’s not the right structure for everyone. Keep reading or watch our short video overview to learn what an S Corp conversion is and if it’s right for you.

Why are my self employment taxes so high?

One of the reasons why federal taxes are so high is because of self employment tax. As a sole proprietor you pay both income tax and self employment tax. That self employment tax is likely why your taxes are so high.

How Self Employment Taxes Work?

When you have a job and you are paid via a paycheck, social security and medicare are taken out of that paycheck. These taxes are 15.3 percent. You pay half, and your employer pays the other half. When you are self employed, and your business makes a profit, you are going to pay that 15.3 percent on your profit.

Here is an example. Say your business brought in $30,000 in revenue, and you had $20,000 in expenses. Your profit is $10,000. You're going to get charged $1,530 on that profit in self employment taxes. In addition, you are going to pay income tax on that $10,000. Your income tax rate depends on your overall income, but it could be as high as 35 percent. If you have a good business, making a solid profit, this tends to get very expensive, very quickly. The S Corp conversion is the antidote for this situation.

How is an S Corp different from an LLC?

When your business becomes an S Corp, you and your business become two separate entities. You become what is called an employee owner of your business. Your S Corp is now a pass-through entity that doesn’t charge you federal taxes. Note that if you are in Oregon, there is an excise tax of $150.

How does an S Corp conversion save me in taxes?

Once you become an S Corp, you pay yourself a combination of payroll and distributions. You pay your social security and medicare via your paycheck. As an employee in your business, you will now pay half of those taxes personally, and your business will pay the other half. Your distributions are no longer subject to those self employment taxes of 15.3 percent.

Previously, none of those self employment taxes were tax deductible, as everything is considered personal income tax. As an S Corp, the half of your self employment taxes that your business pays becomes tax deductible. As an S Corp, you will receive a tax break on the distributions, and you’re able to deduct part of your self employment taxes. This is why the tax savings from an S Corp can be so significant.

How much should I pay myself as a new S Corp?

Ideally, you should pay yourself 50 percent of your profit via payroll and 50 percent via distributions. Distributions are direct transfers from your business to personal bank account. You don't want to pay yourself too much in payroll, because then you'll pay too much in taxes. However, you also don't want to pay yourself too much in distributions because you could potentially get audited. The IRS looks for S Corps that are underpaying themselves in salaries. As part of our S Corp conversion service, we help you with that 50/50 split of payroll and distributions. We also highly recommend you book a projection with us to make sure you’re withholding enough in your paycheck. If you withhold enough via your paycheck, you will no longer need to make quarterly tax payments.

What additional costs are associated with an S Corp?

  • We charge a one-time fee of $350 for the S Corp conversion. The service description is outlined below.
  • You will need payroll software. We recommend Gusto, which costs around $50 a month depending on the size of your company.
  • You will need to pay to have an S Corp tax return. Currently, we charge $750 for this.
  • Most companies will need some assistance with bookkeeping to get their books in order at the end of the year.

Why would an S Corp conversion not be right for me?

We've done some S Corp conversions where it has been kind of overwhelming for the client. Some were not as organized as they wanted to be. If you do not follow through with the S Corp conversion process, or do not have the correct information about your business, it can make your situation worse. We guide people through the process, but it does require communication and cooperation from the client. A sole proprietorship is expensive, but it’s simple. If you’re someone who is already feeling overwhelmed with your business, it’s best to wait to do an S Corp conversion until you feel like you are on solid footing.

FAQ about S Corp Conversions

Am I eligible to become an S Corp?

Your business must already be an LLC from the Oregon Secretary of State website and have an EIN number from the IRS to start the conversion process. If you need help registering as an LLC or obtaining an EIN number, we can help.

What is the process like for an S Corp Conversion?
  1. At the beginning of the year, we meet with you via zoom to collect the necessary information to complete IRS Form 2553 and Oregon’s Combined Employer’s Registration. (If you are not in Oregon, we will complete your state's required form.)
  2. After the forms are complete, we will send them to you via our online portal to review, print, scan and sign.
  3. After you return the signed and completed forms, we will submit them via fax to the Oregon Department of Revenue and the IRS.
  4. In about six weeks you will receive a letter from Oregon with your BIN number. Once you have a BIN number, you will need to set up payroll with Gusto. You should reach out to us at to assist you with this process.
  5. At some point between May-August, we highly recommend you book a meeting with one of our tax preparers to have them prepare a projection for you. This will help determine if your payroll withholding is correct.
Can I keep my EIN?

Yes, you can keep your EIN. Occasionally, the IRS will assign you a new EIN, and you must write them a letter requesting to keep your old EIN.

What is the timeline for a S Corp Conversion?

The S Corp paperwork is due by March 15th of the year you want your conversion – For example to become an S Corp in 2022 application must be received by March 15, 2022 to become an S Corp for the 2022 tax year. If you are interested in becoming an S Corp, please contact us no later than March 1 to allow for enough time for paperwork completion and processing.

How much does it cost to become an S Corp, and what does the service include?

Bonnie Arnold Tax & Accounting charges a fee of $350 for assisting with an S Corp conversion. This includes:

  • The completion and submission of necessary paperwork, including IRS – Form 2553 Election by a small business corporation and the Oregon - Oregon Combined Employer’s Registration.
  • One 1 hour meeting to set up Gusto and determine how much salary to pay yourself, booked after you receive your BIN number.

Note: A projection meeting (cost of $150) to determine if you are having enough tax withdrawn from your paycheck is optional, but highly recommended.

I am interested in becoming an S Corp. What should I do?

Reach out to us at to let us know! We’ll set up a time to go over the process and make sure it’s the right fit for you. Note, we typically do not do S Corp conversions for people who are not interested in becoming a tax client.