I Elected C-Corp for My LLC for "Better Self-Employment Tax": Was That a Mistake?

Someone on Reddit had started a service-based LLC via LegalZoom and received a call from 1800accountant (LegalZoom free consults) about an entity classification election (ECE) deadline and "better self-employment tax rates." They filed to change their LLC to be taxed as a C-Corp and then worried they had made a mistake. For a small service business where the goal is lower self-employment tax, electing C-Corp was likely the wrong move. The structure that usually reduces self-employment tax for LLC owners is S-Corp, not C-Corp. C-Corp brings double taxation and more admin; calling an accountant to confirm the election and see if you can change it is the right next step.

Bottom line: Changing your LLC to be taxed as a C-Corp was likely the wrong move if your goal was lower self-employment tax. C-Corp means entity-level tax plus tax on dividends (double taxation), and salary you take is still subject to payroll tax; for a small service business, C-Corp is usually worse overall, not better. The election that often reduces self-employment tax is S-Corp (reasonable salary + distributions not subject to SE tax). Calling an accountant is the right move: they can confirm whether the C-Corp election has taken effect, whether you can revoke or change it (e.g., back to disregarded LLC or to S-Corp), and model C-Corp vs. LLC vs. S-Corp for your numbers. For advice tailored to your entity and timing, consult a qualified accountant or tax advisor.

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Question from Reddit

Entity Classification Election Mistake??

I recently started a service based business LLC via LegalZoom. A few days ago I received a call from 1800accountant as a part of my free LZ consults saying I was near the deadline for changing my ECE. They said I need to change it for better self employment tax rates. Of course the proceeded to try to upsell me on their services.

I decided to do it myself and filed to change it to the Corporation (C-Corp) option and it seemed like a smart idea. BUT now I'm worried I have made a mistake!! Any input is welcome. And yes, I'll be calling an accountant tomorrow.

Source: Reddit

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Analysis

The user is worried about electing C-Corp treatment for their service-based LLC after being told that changing their entity classification would give "better self-employment tax rates." The issue: C-Corp is not the election that typically reduces self-employment tax for an owner-operator; S-Corp is. C-Corps face double taxation (corporate tax + tax on dividends) and more admin, and are usually a poor fit for a small service business focused on minimizing self-employment tax.

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Answer

Changing your LLC to be taxed as a C-Corp was likely the wrong move if your goal was lower self-employment tax. Here's why, and what to do next.

Why C-Corp is usually wrong for this goal

• C-Corp = the corporation pays entity-level income tax on profits, and when you take money out as dividends you pay tax again on your personal return. That's double taxation.
• C-Corps do not eliminate self-employment tax in the way the call suggested. If you work for the C-Corp, you receive salary (subject to income and payroll taxes). Profits left in the corp are taxed at the corporate level; profits paid out as dividends are taxed to you but not subject to self-employment tax, so in theory some of your take-home could be dividends. But for a small service business where most profit is from your own work, the IRS expects reasonable compensation (salary), and you still pay payroll tax on that. The corporate-level tax on top of that usually makes C-Corp worse, not better, for overall tax.
• The structure that often reduces self-employment tax for LLC owners is S-Corp election: you pay yourself a reasonable salary (subject to payroll/self-employment tax) and can distribute remaining profit as distributions (generally not subject to self-employment tax). One level of tax, with potential savings on the distribution portion.

So what happened?

• The pitch about "changing your ECE for better self-employment tax rates" usually points toward S-Corp, not C-Corp. Electing C-Corp was likely a mistake for a service-based LLC where the main goal is lowering self-employment tax.
• Calling an accountant tomorrow is the right move. They can:
  • Confirm whether the C-Corp election has already taken effect and for which tax year.
  • Explain whether you can revoke or change the election (e.g., back to disregarded LLC or to S-Corp), and by when. There are deadlines and IRS procedures (e.g., Form 8832 for entity classification, Form 2553 for S-Corp).
  • Model C-Corp vs. LLC vs. S-Corp for your actual numbers so you know the real impact.

What you can do

• Don't panic. Even if the election is in place, an accountant can help you see if you can change it for the current or next year and how to file going forward.
• Gather any confirmation from the IRS or state that the C-Corp election was accepted, and your formation/LLC paperwork, so the accountant has the full picture.
• Margen can help you model LLC vs. S-Corp vs. C-Corp at your income level so you understand the tax difference before and after you talk to the accountant.

Related: Converting from S-Corp Back to LLC · Entity Choice: Wisconsin Corporation or Disregarded Entity · Nurse Practitioner Entity Choice: LLC, S-Corp, or C-Corp · New Company C-Corp, Thought S-Corp (Form 2553)

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Applicable Sections

Federal / IRS

• Form 8832: Entity Classification Election; used to choose how an eligible entity (e.g., LLC) is taxed (e.g., as a corporation). Revocation or change has timing and procedural rules. (IRS Form 8832)
• Publication 3402: Tax issues for LLCs, including default treatment (disregarded or partnership) and elections (C-Corp vs. S-Corp). (IRS Publication 3402)
• Form 2553: S-Corp election; if you qualify, you can elect S-Corp treatment so income is pass-through and only salary is subject to payroll/self-employment tax; distributions generally are not.

State / Local

• State and local rules (e.g., NYC) can affect entity recognition, annual filings, and tax. A local pro can advise.

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Practical Notes

• C-Corp: Double taxation, more admin (e.g., separate corporate return, formalities). Usually not the right choice for a small service business trying to cut self-employment tax.
• LLC (default): Pass-through; profit taxed once on your return, with self-employment tax on net profit. Simple and often correct for a new service business.
• S-Corp election: Pass-through with potential reduction in self-employment tax on the portion taken as distributions; requires reasonable salary and payroll. Often the "better self-employment tax" option the sales call had in mind, not C-Corp.
• Next step: Work with your accountant to confirm the current election, see if you can switch (e.g., back to LLC or to S-Corp), and plan filings. Margen can help you compare tax outcomes for each option so you're prepared for that conversation.

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Limitations

This answer does not cover state formation or tax, exact revocation/change procedures for Form 8832, or multi-member or multi-entity situations. For advice tailored to your entity, timing, and state, consult a qualified accountant or tax advisor. Margen can help you model LLC vs. S-Corp vs. C-Corp.