If you are not registered as an S-Corporation, you are probably paying too much in taxes. Most small business owners overlook the huge tax savings an S-Corp can offer. It is a powerful tool that can reduce your tax burden and protect your assets. Here we will learn how to file your S-Corp registration and start benefiting from these tax savings today. By the end of this guide, you will know how to maximize your earnings and minimize your taxes.
1. Form a Corporation/LLC
You must need to form a corporation or a LLC in order to register as an S-Corporation. The S Corporation status is not a business entity itself but rather a tax designation that applies to an S corporation or LLC.
2. Get an EIN
An Employer Identification Number (EIN) is a unique number assigned by the IRS to identify a business entity for tax purposes. This number is important if your business:
- Plans to hire employees
- Open a business bank account
- File federal taxes
How To Apply for an EIN
Eligibility
Make sure your business meets the IRS eligibility criteria for an EIN. Your business must be local in the U.S. or U.S. territories, and you must have a valid Taxpayer Identification Number (such as a Social Security Number).
Online Application
1. Visit the IRS Website
You can apply for an EIN directly through the IRS website. The process is free, and you can complete it online, which is the fastest way to receive your EIN.
Go to the IRS EIN application page. The online application is available Monday to Friday from 7:00 AM to 10:00 PM (Eastern Time). You must complete the application in one session, as the system will not save your progress. Once completed, you will receive your EIN immediately.
2. Apply by Fax or Mail
Download IRS Form SS-4 if you are unable to apply online. After filing it out, you can fax it to the IRS or mail it to the appropriate address. This process will take several weeks as the IRS will process your application and send your EIN by mail.
3. Apply by Phone (International Applicants)
You can apply by phone by calling the IRS at +1-267-941-1099 (not a toll-free number) if your business is based outside the U.S. Be prepared to provide information about your business and its structure.
3. Meet Eligibility
The IRS has strict criteria, and failing to meet any of them can result in the loss of your S-Corp status. Here are the core S Corp requirements:
- Must be a domestic corporation under the laws of the U.S. state, territory, or the District of Columbia.
- Your business can have no more than 100 shareholders.
- Your company must have only one class of stock.
- Only certain individuals and entities can be shareholders of an S-Corp:
- U.S. citizen resident aliens
- Trusts (Grantor Trusts, Qualified Subchapter S Trusts, and Electing Small Business Trusts)
- Ineligible shareholders (Nonresident aliens, partnerships, other corporations, and certain types of banks, insurance companies, and Domestic International Sales Corporations (DISCs)
Your S-Corp status will be automatically terminated if you violate any of the S-Corp eligibility requirements.
4. File Form 2553
This form allows eligible corporations to elect pass-through taxation, in which the company’s income and losses flow directly to shareholders’ personal returns. Make sure all shareholders consent, and submit the Form 2553 within 2 months and 15 days from the start of your tax year for timely processing and approval.
5. Comply with State Laws
Most states automatically recognize your federal election when you file IRS Form 2553 to elect S-Corp status. However, a few states like New York, New Jersey, Ohio, Arkansas, and Wisconsin require you to file separate state-level S-Corp elections or opt-out forms.
All states have ongoing requirements like filing annual reports, paying franchise or minimum taxes, and meeting publication requirements in states like:
- New York
- New Jersey
- Arizona
Nebraska - Pennsylvania
6. Establish Formalities
Establish formalities once your business is officially registered as a corporation or LLC and you have elected S-Corp status. Here are the key formalities to follow:
- Create corporate bylaws
- Issues stock
- Hold board and shareholder meetings
- Keep detailed records
7. Maintain Compliance
File Form 1120-S annually to report income, deductions, and distributions. Make sure you pay yourself a reasonable salary via payroll, withholding taxes, and filing payroll tax returns. Distribute remaining profits as dividends. Non-compliance with salary rules or late filing can result in:
- Penalties
- Back taxes
- IRS scrutiny
Keep thorough records to stay compliant.
Conclusion
Registering as an S-Corp can be a game-changer for your business. However, the complex process involves paperwork and legal formalities that require precision. Various online services simplify the process of forming an S-Corp, including the paperwork required. They also help with EIN applications, state-level S-Corp elections, and other compliance needs. Focus on growing your business while navigating through the process with ease and confidence.