What an S corp election does
An S corporation is not a separate type of company under state law. It is a federal tax choice that an eligible corporation, or an LLC, makes by filing Form 2553 with the IRS. After the S corp election, the company files Form 1120-S, and its profit and losses pass through to the shareholders’ personal returns on Schedule K-1. The company generally does not pay federal income tax itself, which avoids the double taxation of a C corporation.
For an owner-run LLC, the main appeal is self-employment tax. Without the election, all profit of a single-member LLC is usually subject to self-employment tax. With it, the owner takes a reasonable salary through payroll and the rest of the profit is not subject to payroll taxes. That saving is real, but so are the costs: payroll, a separate business return and more bookkeeping. We look at both sides before anything is filed; our guide to LLC vs S corp walks through the trade-off. We are a bookkeeping and tax firm in Rochelle Park, New Jersey, working with owners locally and online.
Who can elect S corp status
The Instructions for Form 2553 allow the election only if the company:
- is a domestic corporation or an LLC eligible to be taxed as one;
- has no more than 100 shareholders;
- has only allowable shareholders: individuals, certain trusts and estates, and certain exempt organizations, but no partnerships or corporations;
- has no nonresident alien shareholders;
- has only one class of stock (differences in voting rights are allowed).
The nonresident alien rule matters for many of our clients. A founder who lives in Turkey or another country and is not a U.S. citizen or green card holder cannot own S corporation shares. In that case a C corporation or an LLC is usually the right structure, and our foreign-owned LLC page explains the filings involved.
Form 2553 deadline
Form 2553 must be filed no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year before. For a calendar-year company that wants S status from January 1, that usually means by March 15. For a newly formed company, the first tax year starts on the earliest date it has shareholders, acquires assets or begins doing business, so the window opens then.
Every shareholder must sign the consent on the form. An LLC that files Form 2553 on time does not need to file Form 8832 separately. The form goes to the IRS by fax or mail, and the IRS confirms acceptance by letter. Missed the deadline? Relief for late elections is often available under Rev. Proc. 2013-30, generally within 3 years and 75 days of the intended effective date, with a reasonable cause statement.
Reasonable salary and payroll
The IRS S corporation compensation guidance requires shareholder-employees of an S corporation to receive reasonable compensation for their work before taking non-wage distributions, and it can reclassify distributions as wages when salary is too low. We help you set a salary you can support with facts about your role and industry, and our payroll services run it with the required federal and New Jersey filings.
New Jersey S corporation rules
New Jersey used to require a separate election on Form CBT-2553. According to the New Jersey S corporation FAQ, for privilege periods beginning on or after December 22, 2022, a federal S corporation is treated as a New Jersey S corporation by default, and the separate election is no longer required. The company provides a shareholder jurisdictional consent instead, and opting out requires the consent of all shareholders. A New Jersey S corporation still pays a minimum tax, currently from $375 to $1,500 depending on New Jersey gross receipts.
Formation first, election second
Many owners form an LLC in New Jersey and add the S corp election later, once profit justifies it. Others file the election right after formation. Either way, the election should be planned with your tax planning and your business tax return in mind. The business formation overview shows how the steps fit together.
Your fee is fixed and agreed before work starts. Book a free review to see whether an S corp election makes sense for you this year.
