Business owners often wonder which business entity makes the most sense for their situation. An S Corporation is a popular choice because it offers both personal liability protection and certain tax benefits for corporate and personal income tax.
This article covers the basics of becoming an S Corporation, including the election process for business tax purposes.
1) How to Become an S Corporation
2) S Corporation Business Operations
1) How to Become an S Corporation
Two business entities can elect to file business taxes as an S Corporation: Inc and LLC. The election process is the same for both.
1.1) Complete IRS Form 2553 Within Two (2) Months and Fifteen (15) Days
The business must complete IRS Form 2553 (Election by a Small Business Corporation) within a certain timeframe.
- For current businesses: no more than two months and 15 days after the beginning of the tax year when the election goes into effect.
- For new LLCs and C Corporations: two months and 15 days from the date of formation to choose the S Corporation election status.
1.2) What Happens If You Miss the Deadline for the S Corp Election
If you miss the deadline, you will follow these tax guidelines for the current tax year:
- Corporations are taxed as C Corporations.
- Single-member LLCs are taxed as sole proprietorships.
- Multi-member LLCs are taxed as partnerships.
1.3) Requesting a Late Election from the IRS
If you are unable to file Form 2553 within the timeframe listed above, you can always request a late election from the IRS.
2) S Corporation Business Operations
S Corporations operate a little differently from other business entities.
Here are the key differences to consider.
2.1) How to Pay Yourself as an S Corp Owner
Because one of the benefits of an S Corporation is the lack of double taxation, it’s important that owners pay themselves correctly. Otherwise, you may trigger a red flag with the IRS and face an audit.
Any S Corporation owner who is active must pay a reasonable salary to themselves. All employee-owners must take a reasonable salary via W-2. The S Corporation’s remaining profits are then taxed on your 1040. So the delta of tax savings is the payroll tax not paid on the owner-draw portion not being paid as a reasonable W2 salary to the owners.
2.2) Ongoing Compliance Requirements for S Corporations
Both LLCs and C Corporations may elect S Corporation status if they meet IRS requirements. However, the process can be complicated. The ongoing compliance requirements vary from state to state, but here are the basics:
LLC Requirements
- Initial Filing: File articles of organization to form an LLC. Pay filing fees.
- Initial Report: Some states require a statement of information with the initial filing.
- Publication Fees: Some states charge a publication fee.
- Annual Report: Most states require an annual report to maintain LLC status.
- Maintaining a Registered Agent: An LLC is required to record a Registered Agent with each state in which they do business. This person (or entity) is notified in the event of a lawsuit.
C Corporation Requirements
- Initial Filing: File articles of organization to form a C Corporation. Pay filing fees.
- Initial Report: Some states require an initial report.
- Publication Fees: Some states charge a publication fee.
- Annual Report: Most states require an annual report.
- Annual Meetings: C Corporations are required to hold annual meetings.
- Meeting Minutes: A written record of meetings is required.
- Maintaining a Registered Agent: A C Corporation is required to record a Registered Agent with each state in which they do business.
Get Help Filing Taxes and Ongoing Operations for your S Corporation
Insogna CPA can answer questions and offer guidance on operating and filing as an S Corporation, helping determine a reasonable W2 salary, and making sure you avoid over-paying unnecessary payroll taxes. Contact us for assistance with tax strategy—we want to help you save as much as legally possible.
