S-Corp Election
An S-Corp election is a formal request that a corporation or LLC sends to the IRS, asking to pay tax under Subchapter S instead of the default rules for its entity type. A business makes this request by filing IRS Form 2553. Once the IRS approves the form, the business no longer pays federal corporate income tax on its profits. Instead, income, losses, deductions, and credits pass through to the shareholders, and each shareholder reports their share on a personal tax return.
Importantly, the election doesn’t change the company’s legal structure. A corporation still stays a corporation, and an LLC still stays an LLC – only the way the IRS taxes the business changes.
Why Businesses Make the S-Corp Election
Most owners file this election to sidestep double taxation. A C Corporation pays tax on its profits at the corporate level, and then shareholders pay tax again on any dividends they receive. Once a business puts an S-Corp election in place, that first layer of tax generally disappears, so profit gets taxed only once, at the individual level.
There’s also a payroll-tax advantage worth considering. An owner who actively works in the business must pay themselves a reasonable salary through payroll, and that salary is subject to Social Security and Medicare tax. However, the owner can then take any remaining profit as a distribution, which typically isn’t subject to self-employment tax. Because of this split, many small business owners choose to pursue the election in the first place.
Who Can File the Election
Before submitting Form 2553, a business must first meet the IRS’s eligibility rules for S corporation status. Specifically, the business must:
- Operate as a domestic corporation or LLC
- Keep its shareholder count at 100 or fewer (the IRS often counts family members as a single shareholder)
- Limit shareholders to individuals, certain trusts, and estates – not corporations, partnerships, or nonresident aliens
- Issue only one class of stock
- Avoid falling into an ineligible category, such as certain insurance companies or financial institutions
Even so, filing the form doesn’t guarantee approval. The IRS checks every eligibility factor before accepting an election, and it can reject or later revoke the status if the business stops qualifying.
Filing Deadline for Form 2553
Timing is one of the trickiest parts of the election. The general rule:
| Situation | Deadline |
|---|---|
| Existing business, calendar tax year | March 15 (2 months and 15 days after the tax year begins) |
| Newly formed entity | 2 months and 15 days after the date of formation |
| Filing for a future tax year | Anytime during the prior tax year |
Miss the window, and the election typically won’t take effect until the following tax year – unless the business qualifies for late-election relief.
How to Complete the Election
- Confirm eligibility against the shareholder, stock, and residency requirements.
- Gather shareholder details – name, address, Social Security number, and number of shares for everyone who needs to sign.
- Complete Form 2553, including the business’s formation date, chosen tax year, and shareholder consent section.
- Get every shareholder’s signature. A missing signature is one of the most common reasons a filing is rejected as invalid.
- Mail or fax the form to the correct IRS service center – Form 2553 cannot be e-filed on its own.
- Check state requirements. Some states, like New York and New Jersey, require a separate state-level S-Corp election form even after the federal one is accepted.
Late Election Relief
Businesses that miss the deadline aren’t automatically out of luck. Under Revenue Procedure 2013-30, the IRS allows late S-Corp elections when the business can show reasonable cause for missing the deadline and has otherwise been acting as though the election were already in place. Late relief typically requires filing Form 2553 with a statement explaining the delay, generally within a set number of years of the intended effective date.
What Happens After the Election Is Approved
Once the IRS accepts the election, the responsibilities don’t stop there. The business must:
- File Form 1120-S annually to report income, deductions, and credits
- Issue a Schedule K-1 to each shareholder showing their share of profit or loss
- Run payroll and pay reasonable compensation to any owner-employee
- Maintain corporate formalities, like bylaws and annual meetings
Violating any eligibility rule after the election is in place – for example, exceeding 100 shareholders or issuing a second class of stock – can cause the IRS to terminate the election, sometimes retroactively. If that happens, the business generally can’t re-elect S-Corp status for five years without special IRS consent.
