Whoa slow down there. Crayon Advisory, LLC values empowering our clients to make informed decisions, including the S-Corporation Election. We support you through those decisions. And, even though this is right here for you to look at on the internet for free, we still think informed decision making is important.

Take a deep breath for me. In. Out. One more time. Okay. Read through these FAQs. They’re here to help.

The short version: S-Corporations are entities who have elected to receive the treatment under IRC Sub-Chapter S (thus S-Corporation). They have limited ownership rules, have specific requirements with regards to the stock they issue, and pass their net income on to their owners.

We won’t make a recommendation for the S-corporation election without doing a comprehensive analysis. In this analysis, we’re looking at:

• Business profitability – is the business profitable and can it support reasonable compensation?
• What is the reasonable compensation for the work done within the business?
• What are the business owners’ goals in business and life? Will the S-corp election help them reach those goals?
• The tax impact (benefits and detriments) of the election on the business and its owners.

We do accept S-Corporation clients who make these decisions on their own, but on a limited basis. We won’t and can’t in good conscious make a recommendation to go ahead with the election without without fully informing you, the business owner, on the impacts of the election.

You are a person. You can’t become an S-corp no matter how hard you try.

Your business may be able to make an election to be treated as an S-Corporation.

To receive this special treatment, entities have to make an election with the IRS. It’s a specific process with specific requriements. And it’s not something we recommend doing on your own…or doing without specific analysis of your business, plus a side of soul-searching.

Remember, just because you can make a decision doesn’t mean you should or that it’s a good idea.

S-Corporations, “pass,” their net profits to their owners according to ownership percentages. If you own 100% of the S-corp, 100% of the net profits are passed-through to you on a Form K-1. If you own 50%, then 50% of the profits are passed on to you. 20% ownership? You guessed it. 20% of the profits.

This profit-pass through can shield owners from paying self-employment tax on 100% of the profits, as a Schedule C or a Partnership would require.

The S-corporation still needs to pay its officers (shareholder-employees, owners, etc) a, “reasonable compensation,” for the services performed for the S-corporation. These reasonable wages are subject to all payroll taxes, inlcuding social security, medicare, and certain state and local taxes (you’ll need to check in on which ones in/for your location). These wages are effectively subject to self-employment taxes.

Reasonable wages are not well defined, but they are well established by the Tax Court.

•  Reasonable compared to others in your industry:
  
  • Would you pay someone else your salary (or the salary your business can sustain) to do your job?
  • Are  your profits after your salary significantly more in relation to your salary?
  • Are you paying yourself the FICA Max($176,100 for 2025)?
• Low wages with distributions can trigger an audit.
  • Distributions can be reclassified as wages, causing you to owe payroll taxes and interest and penalties on back payroll taxes.
• High wages can trigger an audit
  • Not likely to be detrimental other than being audited by the IRS.

Accounting & Bookkeeping

If you’re not already, you’ll need to make use of a double-entry accounting system. Yes, this really and truly is a requirement, and not an optional or thing to do that will get you brownie points.

No, it’s not required by the IRC or the IRS. But there are many cases where the taxpayer has come out on the better side of an audit simply because they had quality books and records (i.e. from an accounting system), and many more where the IRS prevailed because there were not quality books or records.

Annual Tax Return Filing

Your S-corporation is it’s own separate entity and has its own filing requirements. Every year, you’ll have to file an S-Corporation tax return before your can finalize your indiviudal tax return. These returns are usually due on 3/15 and can be extended to 9/15 (or the first business day after if the normal filing due date is a weekend or holiday).

Payroll and Annual Salary Study

Payroll is required – it’s not an extra thing. We generally encourage reviewing the salary you’re paying owners on an annual basis. This may not be necessary every year.

Estimated Tax Payments and Tax Planning

As with any business owner, you should keep up on your bookkeeping and estimated tax payments. We always prepare safe-harbor estimated tax payments with our clients’ tax returns, but those safe-harbor payments may not always be appropriate, particularly in years where the business income increases from the prior year. This planning isn’t quite a straight forward when the income is passing through to you from another entity, especially in and for the first couple of years as an S-corporation.

State and local taxes don’t disappear with your S-corporation election. If you do business in multiple states, your S-corporation will have to file in multiple states. There may be special considerations to make for state and local taxes as well.

There’s also the pass-through entity tax, which is a work-around for the limitation on the deduction for state and local taxes imposed by the Tax Cuts & Jobs Act of 2017. This may help reduce your federal income tax due.

The election itself is fairly straight forward. It’s determining if you qualify and if the election is actually a good idea for your business and your financial goals both now and in the future.

There’s a few simple steps that need to be taken before making an S-corp election. You may have already taken one or more of these:

• Secretary of State registration (usually as an LLC, but talk to your attorney and know your state’s requirements).
• Register for payroll
• Operating Agreement
• Obtain an EIN from the IRS
• Complete the election application and file it.
  • If a late election, work with your tax preparer or attorney to ensure the late election procedure is followed.

The election itself really is that simple.

It’s figuring out if the election is a good idea for you and your business that’s hard.

This is the better question to ask. And it’s the one we’re here to help you explore.

Profit Perspective

If your business’s profits can support a reasonable salary with profit left over, your business may be a good candidate to start exploring the election. If you’re a service provder and your net profits are approximately twice your reasonable salary, your business may be a good candidate to explore the election.

Commitment Perspective

Kind of like acquring a new puppy, just because your business may check a few boxes doesn’t mean this election is right for you or your business. This list is a good place to start:

• You’re committed to doing the accounting on a monthly basis;
• You’re committed to some level of budgeting and planning;
• You’re committed to running payroll regularly;
• You’re committed to looking at reasonable salary requirements on an annual basis;
• You’re comitted to working with a qualified tax professional on your tax planning and projection needs;
• You’re committed to advocate for yourself and your business;
• Your professional team advises you to do this.

You don’t have to be perfect at these things!  You do need to work at them and make sure you have a plan to address all of them.

The first answer is that if you haven’t done the analysis, you shouldn’t make the election. But there are a few more points to consider on who doesn’t make a good candidate.

• You’re not committed to the points listed under the FAQ, “Should I make the Election?”
• Your business owns significant and appreciating assets (building/rental)
• Your business has foreign owners
• Your business isn’t profitable and/or has inconsistent profits
• Your professional team advises against it.