An S corporation is not a type of company. It is a way of being taxed that an eligible corporation or LLC can elect by filing Form 2553 with the IRS. The business itself generally does not pay federal income tax. Profit passes through to the owners, who report it on their own returns.
People look at the election because owners who work in the business can be paid a reasonable salary through payroll, with the remaining profit taken as distributions that are not subject to self-employment tax. Whether that saves money depends on your profit, the salary the IRS would consider reasonable and the extra cost of running payroll and a separate return.
Is your business eligible?
- It is a domestic corporation or an LLC that can be taxed as a corporation
- It has no more than 100 shareholders, who are generally individuals, certain trusts or estates
- It has only one class of stock
- Every shareholder consents to the election
What changes if you elect
Payroll for the owner
Owners who work in the business must be paid reasonable compensation as wages, with payroll tax withheld and filed.
A separate return
The business files Form 1120-S each year and issues a K-1 to each shareholder.
Different rules for distributions and basis
Profit is taxed to you whether or not you take it out, and you need to track your basis so distributions are reported correctly.
State effects
State rules differ. In Texas, the franchise tax applies to the entity regardless of the federal election.
Deadlines
Form 2553 generally has to be filed no later than two months and 15 days after the beginning of the tax year the election is to take effect. The IRS offers late-election relief in some situations. If you think you missed a deadline, tell us early.
When an S corporation is usually not worth it
If your profit is modest, the cost of payroll and an extra return can outweigh the savings. If you have ineligible owners or more than one class of ownership, the election may not be available. We will tell you plainly if it does not fit yet.
How it works
- 1
We run the numbers
We compare your tax as you are now with your tax as an S corporation, including reasonable salary and payroll costs.
- 2
You decide
If the election makes sense, we explain what will change and what it will cost to maintain.
- 3
We prepare and file Form 2553
We prepare the election with each shareholder's consent and file it before the deadline.
- 4
We set up what follows
We help you set up owner payroll and plan the first Form 1120-S.
What we need from you
- The business name, EIN, state and date of formation
- Names, addresses, taxpayer IDs and ownership percentages of every owner
- The tax year you want the election to start
- Last year's tax return and a current profit and loss statement
- Any prior IRS letters about the entity's tax classification
Not sure what applies to you? Send what you have and we will tell you what is missing.
Why work with BUTA Tax
- Tax preparation, bookkeeping, payroll, business formation and IRS help in one firm, so your records line up.
- A secure client portal for your documents and messages, available whenever you need it.
- Starting prices shown on this site and the questions that set your final price asked before you pay.
- An office in Frisco, Texas, and online service for clients across the United States.
Frequently asked questions
Will an S corporation save me taxes?
It can, but not always. The saving comes from the part of your profit that is not subject to self-employment tax, reduced by payroll costs and the extra return. We calculate both sides for your numbers.
What is reasonable compensation?
It is the salary an owner who works in the business should be paid for the services they provide, considering what similar businesses pay for similar work. The IRS expects owner-employees of an S corporation to take a reasonable salary before taking distributions.
Can my LLC elect S corporation status?
Yes, if it meets the eligibility rules. An LLC files Form 2553 and is then taxed as an S corporation, while remaining an LLC under state law.
Is it too late to elect for this year?
It depends on the date. There is a deadline for the election to apply to a given year, and the IRS provides relief for some late filings. Contact us promptly and we will tell you what is possible.
Do you also prepare the S corporation return?
Yes. We prepare Form 1120-S and the K-1s, and we can run owner payroll and bookkeeping.