How to make an S Corp election: A small business guide

Own a profitable US sole proprietorship and think you're overpaying taxes? Consider making an S corporation election to alleviate some of your tax burden while gaining valuable benefits.

In this article, we’ll cover the factors you need to consider before you make the election. When you’re ready to proceed, we’ll show you how to make the election with the Internal Revenue Service (IRS), including: 

• Identifying factors indicating you will benefit from making the election
• Making sure you qualify before submitting the election
• Learning about late elections
• Completing the form
• What you’ll need to do after making the election
• What you’ll need to do after establishing your S corporation.

Let’s dive into it! 

What is an S corporation election?

An S corporation election allows a qualifying business entity to pass income, losses, and deductions to shareholders for federal income tax purposes. Since the profits of the business will be taxed on the respective shareholders’ income tax return, the elected S corporation is not subject to federal corporate income tax, and S corporation distributions from its previously taxed profits are not subject to tax.

To change their status, businesses submit Form 2553 to the IRS by the required due date, meeting specific eligibility criteria before and after throughout its existence. Once approved, the business benefits from pass-through taxation and limited liability protection for shareholders. This election can result in tax savings while protecting personal assets. Ongoing compliance with IRS regulations is necessary to maintain S Corporation status.

After submitting the election, the IRS will mail you a confirmation letter upon approval or reason(s) for rejecting the election. Please reach out to the IRS if you have not received confirmation within 60 days of filing the election. Keep the letter permanently, since it can only be issued once. You may still confirm its status with the IRS, but a copy of the letter can no longer be reproduced.

Key factors you should consider before making an S corporation election 

Here are some key factors that can help you determine if your business will benefit from making an S corporation election:

• You have consistent or are expecting consistent annual profits of at least $30,000 after deducting reasonable shareholder-employee salaries for the year (more on that later!)

• Your business consistently generates positive cash flow every month

• You want to incorporate your profitable sole proprietor business, but want to avoid paying federal corporate income taxes
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By changing your sole proprietor business structure to an S corporation, you’ll most likely save taxes with proper planning. However, there are additional administrative costs that must be outweighed by the benefits. These costs include additional corporate filings such as tax returns, annual reports, licensing, payroll services, etc.

Requirements to elect as an S corporation

To make the S corporation election, you must satisfy all of the following criteria both initially and throughout its existence. The business entity must:

• Initially be either a US formed LLC or regular C corporation registered under state law.
• Only have one class of stock (e.g. only common shares)
• Not have more than 100 shareholders
• Only have shareholders that are US “resident individuals” (US citizens or legal residents of the US)
• Have all shareholders, members, or owners agree to making the election
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Certain types of businesses, such as financial institutions, insurance companies, and international sales corporations, are generally not eligible. Certain trusts and estates may qualify—check with your tax advisor.

How to make an S corp election

After confirming you qualify to make the election, you should do the following: 

• Consult a tax professional: If you have any doubts about making the election.
• Complete Form 2553: Fill out and submit the form to the IRS by fax or mail. Preferably use the certified mail option to make sure it gets there.
• Keep a copy: Retain a signed copy of Form 2553 for your records.
• Submit to IRS: Send Form 2553 to the IRS and keep a copy for records.
• Await approval: Wait for confirmation of S corp status from the IRS.
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Here is a step-by-step guide to complete the form for most situations:

Part I - Election Information

Section A to C: Provide the legal name, address, Employer Identification Number (EIN), date incorporated, and state of incorporation.

Section D

Indicate the effective date of the S corporation election. Typically, it’s January 1 of the initial year or the incorporation date, but it cannot be more than two months and 15 days before or after the date Form 2553 is filed.

Section F 

Select the tax year for the S corporation election. By default, check the calendar year—any other option must meet IRS requirements.

Section H

Add a contact name and phone number in case the IRS needs to contact you.

Section I 

You can file late up to 3 years and 75 days from the effective date as long as you have not filed a previous return for that tax year. However, you’ll need to provide reasonable cause on why you didn’t file on time.

In addition, you’ll need to write on the top of the page of Form 2553 “FILED PURSUANT TO REV. PROC. 2013-30”

An officer must sign under penalties of perjury on Page 1. Make sure you complete the date it was signed.

Page 2 is the Shareholder Consent Statement: All shareholders must provide their nameS, addresses, social security numbers, percentage of stock ownership, and tax year end (December 31), then each must sign and date the form that they consent to the S corporation election.

Page 3, Part II, is used to select a fiscal tax year. Since a calendar year is recommended, you may leave the page blank.

Page 4, Part III, is for a Qualified Subchapter S Subsidiary (QSub) Election. If the corporation is electing to treat a subsidiary as a Qualified Subchapter S Subsidiary (QSub), in most cases, this Part does not apply.

Filing the form

Once completed, file Form 2553 with the IRS by fax or mail. Both the fax number and the filing address is provided in the instructions for Form 2553. Make sure you have the latest version of the instructions from the IRS website since the fax number and addresses may change from time to time.

What is the deadline to make an S corp election?

An S corp election should be made within two months and 15 days from the effective date chosen by the shareholders. Therefore, most of the time, it should be filed on or before March 15 in the year you wish to make the election effective from January 1 of that year.

For example, file the election by March 15, 2024 to become an S corp for the 2024 calendar year.

An existing corporation can also file the election at any time during the preceding tax year for the S corporation election to be valid from January 1 of the following year.

How to combine an LLC with S corp status

While an LLC is not legally a corporation, the S corporation is a special tax status with the IRS. In order to help small businesses, the IRS has allowed LLCs—in addition to regular corporations—to elect to become an S corporation.

What to do after S corporation status is confirmed

Once your business is accepted as an S corporation by the IRS, you will need to do the following:

• Maintain a separate set of books beginning with the election date.

• File Form 1120S (US Income Tax Return for an S corporation) annually with the IRS. It’s due March 15 for the previous calendar year’s tax return. For example, the tax return for 2023 will be due on March 15, 2024.

• File the applicable state tax returns. While some states also exempt S corporations from state income tax, other states may require S corporations to pay state income tax at the corporate level when filing the state return. A very small number of states, such as New Jersey, also require you to make a separate S corporation election. Find out if which state return you’ll need to file by visiting their government’s website or asking a tax professional

• Determine reasonable compensation for each shareholder-employee. Reasonable compensation is the value that would ordinarily be paid for your services by similiar enterprises under similar circumstances. Basically, it’s the amount you’d pay someone to do your exact job if you were to hire an employee.

• Set up payroll for shareholder-employees and run regular payroll for them.

• Each shareholder reports their share of annual income, profits, deductions, and tax credits from their individual Schedule K-1, filed with the tax return and provided by the S corporation, in addition to any W-2 wages income from payroll.

• You must continue to maintain the initial criteria to qualify as an S corporation throughout your S corporation’s existence, or else it will be taxed as a regular corporation subject to corporate income tax.

• S corporations are for active businesses, and not for passive investment businesses. If your passive income, such as rents and royalties, exceeds 25% of gross receipts for three consecutive years, you will lose your S corporation status.

Get started filing for S corporation status now

Congratulations! You’ve made it to the end of our article, which means you might be interested in making that S corporation election.

To recap, the deadline to make the S corporation election is usually March 15 if you want to make it for the entire current calendar year.

If you’re reading this article after that date and it’s not your first year as an LLC or corporation, you can make the election for next year. If you qualify, you can make a late election—but please don’t rush!

Taxes can get really complicated in a hurry, so when in doubt, make sure you connect with a tax professional. Don’t know of any? No worries, Wave Advisors has got your back. Wave’s in-house experts can coach you through the process or prepare Form 2553 for you to sign. Book your free consultation today!