Elect S Corporation Status Quickly and Affordably

Yes, there are a few.

S Corporation election qualifications include:

• Must be filed as a U.S. corporation
• Can maintain only one class of stock
• Is limited to 100 shareholders or less
• Shareholders must be individuals, estates, or certain qualified trusts
• Requires each shareholder to consent in writing to the S Corporation election
• Requires each shareholder to have a US Social Security Number
• Requires each shareholder to be a US Citizen or permanent resident alien with a valid United States Social Security Number
• Must have a tax year ending on December 31

The majority of states automatically recognize the federal S Corporation election, but some do require additional filings. For example:

• New York requires Form CT-6
• New Jersey historically required a separate election but now automatically honors the federal election
• Utah corporations must attach the IRS acceptance letter to their first state return
• Pennsylvania and Wisconsin recognize the federal election but allow shareholders to opt out with state forms
• District of Columbia, Louisiana, Tennessee, and Texas, may have additional requirements or do not recognize the S Corporation election in the same way due to their tax structures

Business owners should carefully review their state’s Department of Revenue guidance or consult a tax professional to ensure compliance.

Businesses should receive email confirmations from the IRS regarding the status of their request and whether it was approved. Generally, the expected response time is two to three months after Form 2553 was filed.

Existing LLCs and C Corporations with a tax year beginning on January 1 had until March 15, to file IRS Form 2553. Businesses that have a fiscal year other than the calendar year have until two months and 15 days after the start of their fiscal year to complete their S Corp election form. Entrepreneurs who launch a new business in 2022 have two months and 15 days from their date of formation or incorporation to file for S Corporation tax treatment for their entire 2022 tax year.

If you have reasonable cause for not filing Form 2553 on time, the IRS may cut them some slack and approve the S Corp election retroactively to the start of the LLC’s or C Corporation’s tax year. The business owner must explain on Form 2553 why they are applying after the deadline.

Reasonable Cause Examples the IRS Might Deem Valid:

• The business’s responsible party, accountant, or tax professional failed to submit Form 2553.
• The corporation’s leadership or shareholders weren’t aware they had to submit Form 2553 to the IRS.
• The corporation’s leadership or shareholders weren’t aware of the deadline for submitting Form 2553.

When requesting relief due to reasonable cause, the client should prepare to explain the facts of why they missed the deadline and are filing late. Also, they should disclose how they handled tax affairs when they wanted to be considered an S Corp but weren’t yet approved to do so. Another critical point to communicate is what the LLC or C Corporation did to fix the situation upon learning they hadn’t requested S Corp election correctly.

If you’ve set your sights on S Corporation tax treatment effective in the following tax year, you can file Form 2553 anytime in the current year.

At the federal level, S Corporations generally do not pay income tax at the entity level. Instead, business income, losses, deductions, and credits pass through to shareholders, who report them on their individual tax returns. Shareholders then pay tax at their personal income tax rates. However, there are exceptions: S Corporations may be subject to certain entity-level taxes, such as the built-in gains tax or excess passive income tax. Additionally, some states impose their own franchise or income taxes on S Corporations regardless of pass-through status. For instance, California imposes a minimum $800 franchise tax.

S Corporations must carefully balance payroll and distributions. Shareholder-employees are required to take a reasonable salary for their work, and these wages are subject to federal payroll taxes (Social Security and Medicare). Once reasonable compensation has been paid, additional profits may be distributed to shareholders as dividends, which are not subject to self-employment tax. This creates a tax savings advantage compared to sole proprietorships or partnerships. However, improper classification of wages as distributions can result in IRS penalties, so careful planning and payroll compliance are essential.

This refers to fringe benefits for S Corporation shareholders who own more than 2% of the company. Unlike employees in C Corporations, these shareholders cannot receive many fringe benefits tax-free. Instead, benefits such as health insurance premiums must be included as taxable wages on the shareholder’s W-2. This rule is designed to prevent small groups of owners from avoiding payroll taxes through untaxed benefits.

S Corporations must comply with both federal and state requirements to maintain good standing:

• At the federal level, they must file Form 1120-S annually and issue Schedule K-1 forms to shareholders.
• States may also require annual reports, franchise taxes, or separate tax filings.
• From a governance perspective, S Corporations must maintain bylaws, issue stock certificates, hold annual shareholder and board meetings, and keep minutes of those meetings.

Failure to follow corporate formalities may result in loss of liability protection, exposing shareholders to personal liability.

The IRS requires S Corporation shareholder-employees to pay themselves a ‘reasonable salary’ for the work they perform before taking profit distributions. Reasonable compensation is based on industry standards, job duties, experience, and comparable wages. For example, if similar positions in your field earn $60,000 annually, paying yourself only $10,000 and taking the rest as distributions would likely raise a red flag with the IRS. In practice, many accountants recommend allocating 40–60% of net income to salary, though the actual figure should be supported by data. Failure to pay reasonable compensation may lead to IRS penalties and reclassification of distributions as wages, with back taxes owed.

Yes, there are a few. 

S Corporation election disadvantages include:

• S Corporations may not have more than 100 shareholders
• An S Corp may come under closer scrutiny by the IRS and other tax authorities
• There is no uniform S Corporation tax treatment across states
• Only eligible domestic corporations and LLCs qualify for S Corp status
• Partnerships, corporations, and non-resident aliens are ineligible
• Because of the flow-through taxation (business income taxed at the individual tax rates) with the S Corporation, shareholders of a corporation may end up in higher tax brackets
• Subchapter S Corporations must adopt a calendar year as its tax year
• Only one class of stock allowed
• Owners who do substantial work for a Subchapter S Corporation are considered employees, which brings greater payroll responsibilities

It may. Filing as an S Corporation requires preparing IRS Form 1120-S, maintaining payroll compliance, and issuing Schedule K-1s to shareholders. These additional requirements often increase accounting costs compared to a Sole Proprietorship or Partnership. Keep in mind the potential tax savings often outweigh the higher compliance expenses.