An S Corp is not a separate business structure in Alabama — it is a federal tax election that an existing LLC or corporation makes with the IRS. An Alabama LLC that elects S Corp status keeps all its legal protections but is taxed differently, allowing owners to reduce self-employment taxes on a portion of their income. You file Form 2553 with the IRS to make the election. Alabama automatically follows the federal S Corp election for state income tax purposes.
LLC vs. S Corp — what's actually different
This is the most common point of confusion: you don't choose between an LLC and an S Corp. You form an LLC, then optionally elect S Corp tax treatment. The LLC remains your legal entity — the S Corp election only changes how the IRS taxes your income.
| Feature | LLC (default tax) | LLC with S Corp election |
|---|---|---|
| Legal structure | LLC | LLC (unchanged) |
| Liability protection | Yes | Yes (unchanged) |
| How profits are taxed | All profit = self-employment income | Salary + distributions split |
| Self-employment tax | 15.3% on all net profit | 15.3% on salary only |
| Payroll required? | No | Yes — owner must take a salary |
| Complexity | Low | Higher — payroll, separate returns |
| Best for | Net profit under ~$50k | Net profit above ~$50k–$80k |
How the S Corp tax savings work
As a single-member LLC with default tax treatment, every dollar of net profit is subject to the 15.3% self-employment tax (Social Security and Medicare). On $100,000 of profit, that's $15,300 going to SE tax before you even get to income tax.
With an S Corp election, you split your income into two buckets:
- Salary — a "reasonable compensation" you pay yourself as an employee. Subject to payroll taxes (same 15.3% split between employee and employer).
- Distributions — profit passed through to you as an owner. Not subject to self-employment tax.
The savings come from the portion you take as distributions instead of salary. The IRS requires your salary to be "reasonable" for your role — you can't pay yourself $1 and take the rest as distributions.
The actual savings depend on your net profit, your reasonable salary, and your specific tax situation. The savings must also be weighed against the added costs of S Corp compliance — payroll processing, quarterly filings, and a separate S Corp tax return (Form 1120-S).
The breakeven point for most Alabama LLCs is roughly $50,000–$80,000 in annual net profit. Below that threshold, the cost of payroll administration and additional tax filings often offsets the SE tax savings. Above it, the savings typically justify the complexity. A CPA familiar with Alabama small business taxes can calculate your exact breakeven.
S Corp requirements — who qualifies
Not every Alabama LLC qualifies for S Corp election. The IRS requirements are:
- Must be a domestic entity (organized in the US)
- No more than 100 shareholders
- Shareholders must be US citizens or permanent residents — no foreign owners
- Only one class of stock (or membership interest for LLCs)
- Cannot be certain ineligible types: insurance companies, certain financial institutions, international sales corporations
- All shareholders must consent to the election in writing
For most small Alabama LLCs with one or two owners, these requirements are not a problem. Multi-member LLCs with foreign investors or complex ownership structures may not qualify.
Alabama state tax treatment of S Corps
Alabama automatically recognizes the federal S Corp election — you do not need to file a separate Alabama S Corp election. Once your federal Form 2553 is approved, your LLC is treated as an S Corp for Alabama income tax purposes as well.
Alabama S Corps file Alabama Form 20S (S Corporation Information/Tax Return) annually with the Alabama Department of Revenue. The S Corp itself does not pay Alabama income tax — income passes through to the owners, who report it on their individual Alabama returns.
Alabama also requires S Corps to pay the Alabama Business Privilege Tax annually — the same minimum $100 to maximum $15,000 filing required of all Alabama LLCs and corporations. See our Alabama Business Privilege Tax guide for details.
| Federal form | Form 2553 (Election by a Small Business Corporation) |
| Filed with | IRS (not Alabama — state follows automatically) |
| Deadline (new LLC) | Within 75 days of LLC formation for same-year election |
| Deadline (existing LLC) | By March 15 to take effect for that tax year |
| Alabama state form | Form 20S — filed annually with AL Dept. of Revenue |
| Payroll required? | Yes — owner must receive reasonable salary |
| Federal tax return | Form 1120-S filed annually |
| Cost to file Form 2553 | Free — no IRS fee |
How to elect S Corp status for your Alabama LLC
Confirm your LLC is formed and in good standing
You must have an existing Alabama LLC before making the S Corp election. If you haven't formed your LLC yet, do that first. Your LLC must be current on its Alabama Business Privilege Tax filing.
Get an EIN if you don't have one
You need a federal Employer Identification Number to file Form 2553. If you formed your LLC as a sole member and haven't gotten an EIN yet, apply at IRS.gov — it's free and instant. See our EIN number guide for Alabama LLCs.
Complete IRS Form 2553
Download Form 2553 from IRS.gov. Fill in your LLC name, EIN, state of formation (Alabama), date of formation, and your desired election effective date. Every shareholder or member must sign Part I. For a single-member LLC, only you sign.
File Form 2553 with the IRS by the deadline
Mail or fax Form 2553 to the IRS service center for your region. There is no online filing option. For Alabama LLCs, mail to the IRS Cincinnati or Ogden service center depending on your filing method. Keep a copy and proof of mailing. The IRS will send a CP261 notice confirming your election — this typically takes 60–90 days.
Set up payroll for your salary
Once the S Corp election is active, you must run payroll for your owner salary. Set up a payroll system — Gusto, QuickBooks Payroll, or similar — and begin paying yourself a reasonable W-2 salary. You must withhold and remit payroll taxes quarterly.
File Form 1120-S and Alabama Form 20S annually
Each year, your S Corp files a federal Form 1120-S (due March 15) and Alabama Form 20S. Each owner receives a Schedule K-1 showing their share of income, which they report on their personal returns. Work with a CPA familiar with Alabama small business tax to handle these filings correctly.
S Corp deadline — when to file Form 2553
The timing of your Form 2553 filing determines which tax year your S Corp election takes effect:
- New LLC: File within 75 days of your LLC's formation date to have the S Corp election apply to your first tax year.
- Existing LLC — next year election: File by March 15 of the current year to have the election take effect for that full calendar year.
- Existing LLC — missed deadline: The IRS allows late elections with reasonable cause. You can often get the election approved retroactively by filing a late Form 2553 and attaching a statement explaining the delay.
Missing the 75-day window as a new LLC means your S Corp election won't take effect until the following tax year. If you're forming a new LLC and already know you want S Corp treatment, file Form 2553 immediately after receiving your EIN — don't wait.
When an S Corp election doesn't make sense
S Corp status is not right for every Alabama LLC. Consider skipping the election if:
- Your net profit is under $50,000 — payroll costs may exceed the SE tax savings
- You have foreign owners or investors — they disqualify the LLC from S Corp election
- Your LLC has complex ownership with multiple classes of membership interest
- You plan to reinvest most profits back into the business rather than taking distributions
- You're in the first year or two and your income is unpredictable — S Corp adds compliance obligations you must meet regardless of profit