Against this savings, you have to balance the time and costs of running payroll and form 2553 instructions tax withholding. To learn more about what this will cost, get a free tax consultation. To elect to become an S corp, file Form 2553 with the IRS.

• To realize tax savings with an S-corp, the company’s profits typically must be greater than what you’d reasonably make as salary.
• You can technically file Form 2553 at any point in the tax year preceding the tax year it is to take effect.
• Do not send payment with your completed Form 2553, as you will receive a bill after the form has been processed.
• Print and use additional copies of this page if you need more rows to fill in more shareholders’ information.
• A small business that wants to avoid this “double taxation” of company profits can consider filing Form 2553 and electing to be taxed as an S-corp instead.
• Having everything centralized in TaxDome helps us, and it helps the client.
• If filing on or after the date, all shareholders (current and former) who owned stocks during the period that begins on the effective date and ends on the day of the election must consent.

Form 8832 vs. Form 2553 vs. Default: Choosing the Right Tax Path for Your LLC

After filing, wait for the IRS to approve or deny your request. You don’t need this section if you’re filing within the deadline. Wet signature of income beneficiary or your signature and title or that of any other legal representative. If you intend to make a 444-section election, fill out this part, and agree to adopt or change to a tax year ending December 31 if necessary.

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The election can be attached to the first Form 1120-S for the year including the effective date if filed simultaneously with any other delinquent Forms 1120-S. A corporation or other entity eligible to elect to be treated as a corporation may elect to be an S corporation only if it meets all the following tests. In essence, the decision and process to file Form 2553 (and skip Form 8832) for an LLC involve coordination between you, the IRS, and possibly financial professionals. Accountants and lawyers serve as guides who can navigate the twists and ensure you stay on track (and out of trouble).

Step 1: Check S Corp Eligibility

• All shareholders of an S corporation pay personal income tax rates instead.
• Generally, tax returns and return information are confidential, as required by section 6103.
• If the election is made, the subsidiary’s assets, liabilities, and items of income, deduction, and credit generally are treated as those of the parent.
• We may receive a commission if you sign up or purchase through links on this page.
• As with most forms, the first section is where you enter basic information about the company, such as its name, address and Employer Identification Number (EIN).

The S corp tax classification allows business owners to be taxed as employees of an LLC. Under an S corp, the LLC business owner pays FICA (Medicare and Social Security Tax) and income tax on their salary. The IRS does allow relief for forms that are filed after the deadline if a business can show a reasonable cause for why the form is being filed late. Electing your business for S corporation status through Form 2553 can have a varying impact on how you pay taxes, depending on the current tax status of your business. Transitioning to an S corporation will implement pass-through taxation, meaning all shareholders can pay tax on their personal income and not at the corporate level.

Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist covering small business marketing content. She is a former Google Tech Entrepreneur and she holds an MSc in International Marketing from Edinburgh Napier University. This section is similar to Part I, you’ll need to fill in the income beneficiary’s name, address, and Social Security number, as well as the trust’s name, address, and EIN.

The Secrets of IRS Form 2553: Everything You Need to Know

The service center will notify the corporation (entity) if its election is accepted and when it will take effect. The corporation (entity) will also be notified if its election isn’t accepted. The corporation (entity) should generally receive a determination on its election within 60 days after it has filed Form 2553.

However, for S corps, the deduction doesn’t apply to profits paid out as wages. For some LLCs, the cost of hiring a payroll service and bookkeeper would outweigh the financial tax advantages of electing S corp tax classification. The IRS requires that businesses that elect the S corp status have 100 shareholders or less and they are only allowed to issue one class of stock. It only makes sense to file taxes as an S corp if there is enough profit to pay owners a reasonable salary and substantial distributions. The final section must include the name and address of all shareholders and their signatures consenting to S corp election. Form 2553 is used by C-corporations and limited liability companies (LLCs) that want to file taxes as an S-corp.

Once approved, the election remains valid indefinitely, so you don’t have to file Form 2553 annually. To change the corporation’s classification, shareholders must submit the statement of revocation to the IRS office, where they file their tax returns. The section doesn’t define a small business, while the IRS assigns small business designations to companies based on individual tax law statutes. However, corporations with over a hundred shareholders are ineligible for the S corporation status. If you’re filing before the effective date entered on line E, only enter shareholders who own stock on the election day. If filing on or after the date, all shareholders (current and former) who owned stocks during the period that begins on the effective date and ends on the day of the election must consent.

But as an S-corporation shareholder, you’re considered an employee and pay yourself a reasonable salary that’s subject to income tax, Social Security, and Medicare taxes. Shareholders are also allowed to take distributions from the S corporation that aren’t subject to Social Security or Medicare taxes—only income taxes. So, a C corporation with $1,000 in net profits that have been distributed to shareholders will result in a corporate tax of approximately $210 (based on the current corporate tax rate of 21%).

After doing this, it’s also worth following up with the IRS to ensure that they have received the corrected information. Having everything centralized in TaxDome helps us, and it helps the client. We ask for the information on this form to carry out the Internal Revenue laws of the United States. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax. Each shareholder consents by signing and dating either in column K or on a separate consent statement.