S Corporation Compliance Requirements

Overview

S Corporations benefit from pass-through taxation, but this advantage comes with specific compliance requirements. Failing to meet these requirements can result in the loss of S Corporation status, potentially leading to double taxation and other adverse consequences.

Key Compliance Requirements

1. Initial and Ongoing Eligibility

Domestic Corporation: Must be a domestic corporation organized under U.S. federal or state law
Eligible Shareholders: Limited to individuals, certain trusts, and estates (no partnerships, corporations, or non-resident alien shareholders)
Shareholder Limit: No more than 100 shareholders
Single Class of Stock: Only one class of stock with identical distribution and liquidation rights

2. Proper Election Filing

Form 2553 must be filed with the IRS
Within 2 months and 15 days from the beginning of the tax year the election is to take effect, or
At any time during the preceding tax year
All shareholders must consent to the S Corporation election

3. Annual Tax Filings

Form 1120-S: U.S. Income Tax Return for an S Corporation
Due by the 15th day of the 3rd month after the end of the tax year (March 15 for calendar-year taxpayers)
Six-month extension available (Form 7004)
Schedule K-1: Must be provided to each shareholder
Reports each shareholder's share of income, deductions, credits, etc.
Due the same date as Form 1120-S

4. Reasonable Compensation Requirements

Shareholder-employees must receive "reasonable compensation" for services
Must be paid as W-2 wages subject to employment taxes
Cannot substitute distributions for reasonable compensation
Factors determining reasonable compensation:
Training and experience
Duties and responsibilities
Time and effort devoted to business
Compensation compared with non-shareholder employees and businesses
Compensation history and dividend history

5. State-Specific Requirements

Annual Reports: Most states require annual reports with filing fees
State Tax Returns: Many states require S Corporation tax returns
Franchise Taxes: Some states impose franchise taxes on S Corporations

6. Corporate Formalities

Regular board meetings with minutes
Shareholder meetings with minutes
Maintaining separate corporate bank accounts
Keeping corporate and personal finances separate
Maintaining proper corporate records

Consequences of Non-Compliance

Loss of S Corporation Status: IRS can terminate S Corporation status for violations
Reclassification of Income: IRS may reclassify distributions as wages if reasonable compensation requirements aren't met
Penalties and Interest: For late or incorrect filings
Personal Liability: Failure to observe corporate formalities can lead to piercing of the corporate veil

How We Can Help

Our firm specializes in S Corporation compliance, offering:

Complete Compliance Reviews: Comprehensive evaluation of your S Corporation's compliance status
Reasonable Compensation Analysis: Documentation supporting your compensation structure
Corporate Governance Support: Assistance with maintaining corporate formalities
Tax Filing Services: Timely and accurate preparation of all required federal and state forms
Ongoing Monitoring: Regular reviews to ensure continued compliance with changing regulations