The S corporation election
Who can elect, the Form 2553 deadline, reasonable pay, the $7,424.33 it saves a consultant — and why Northwind can't stay one after a round.
An S corporation is a corporation, or an eligible LLC, taxed as a pass-through because it elected to be. The election is only open to a small business corporation: a domestic corporation with no more than 100 shareholders, all of them individuals (other than nonresident aliens), estates, or certain trusts and exempt organizations, and only one class of stock. Differences in voting rights alone don't make a second class.
Electing: Form 2553
Form 2553 is signed by every shareholder and filed no more than 2 months and 15 days after the start of the tax year the election is to take effect — or at any time in the year before. The 2 months run from the day of the month the tax year begins to the day before the same day two months later, and the 15 days follow — so for a calendar year starting January 1, March 15. An eligible LLC files Form 2553 alone; it doesn't need Form 8832 too. A missed deadline can often be cured under Rev. Proc. 2013-30.
During 2026
Earliest: any day in 2026, the year beforeForm 2553
March 15, 2027
Latest for 2027: 2 months and 15 days after January 1Form 2553
March 15, 2028
First S corporation return, for 2027Form 1120-S
The salary rule, and the reason people elect
An owner who works in an S corporation must be paid reasonable compensation as wages, through payroll with FICA, before the company makes other distributions to them. The rest of the profit passes through on the K-1 and isn't subject to self-employment tax. That gap is why profitable owner-operators elect.
Single-member LLC
- Good at
- No payroll, no second return.
- Simplest books.
- Watch for
Self-employment tax on all $150,000.
- Best for
- Profit too small for the savings to cover the extra costs.
S corporation
- Good at
- $7,424.33 less in Social Security and Medicare in this scenario.
- Still one layer of income tax.
- Watch for
- Payroll and a defensible salary every year.
- Form 1120-S and K-1s.
- Closes the door on preferred stock and fund investors.
- Best for
- A steady, profitable owner-operator with US individual owners.
S status saves tax on profit above a reasonable salary — and is lost the day a fund or a second class of stock arrives.
In this lesson: reasonable compensation — what sets it, and how the salary and the distribution are booked.
Pages in this lesson
1 page goes deeper, about 4 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- 26 U.S.C. §1361(b)(1), (c)(4) (opens in a new tab)Small business corporation: no more than 100 shareholders, eligible shareholders only, one class of stockFree to read
- 26 U.S.C. §1362(d)(2) (opens in a new tab)An S election ends when the corporation stops qualifying, effective that dateFree to read
- IRS guidance
- Instructions for Form 2553 (Rev. December 2020), When To Make the Election (opens in a new tab)Form 2553 — when to elect, and relief for a late election under Rev. Proc. 2013-30Free to read
- Instructions for Form 2553 (Rev. December 2020), Purpose of Form (opens in a new tab)An LLC can elect S status on Form 2553 aloneFree to read
- IRS, S corporation compensation and medical insurance issues (opens in a new tab)Reasonable compensation, and the factors that set itFree to read
- IRS, S corporations (opens in a new tab)S corporations — eligibility and Form 2553Free to read
- Official form
- Form 2553 (Rev. December 2017) (opens in a new tab)Form 2553, Election by a Small Business Corporation (PDF)PDF · Free to read
- Form 1120-S (2025) (opens in a new tab)Form 1120-S, U.S. Income Tax Return for an S Corporation (PDF)PDF · Free to read
- Background reading — not an authority
- Wikipedia, “S corporation” (opens in a new tab)S corporationFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- S corporationA domestic corporation, or an LLC eligible to be treated as one, that has elected on Form 2553 to pass its income, losses, deductions and credits through to its shareholders. No more than 100 shareholders, all of them individuals other than nonresident aliens, estates, or certain trusts and exempt organizations, and one class of stock. Files Form 1120-S
- Form 2553The S corporation election, signed by every shareholder and filed no more than 2 months and 15 days after the start of the tax year it is to take effect, or at any time in the year before. An eligible LLC files it without Form 8832; a late election can be rescued under Rev. Proc. 2013-30
- Reasonable compensationThe wages an S corporation must pay a shareholder who works in the business, for that work, before it makes non-wage distributions to them. A C corporation's founder on payroll is an employee too, but the rule is the S corporation's
- Schedule K-1The statement a partnership (with Form 1065) or an S corporation (with Form 1120-S) gives each owner, reporting that owner's share of income, deductions and credits for their own return
- Liquidation preferenceA preferred stockholder's right to be paid a stated amount — usually 1× the original issue price plus declared but unpaid dividends — before common stockholders in a sale or liquidation. Non-participating preferred takes the greater of that or its as-converted share; participating preferred takes both
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.