You’re an S-Corp Now—Here’s What That Means and How to Stay Compliant

Congratulations on transitioning to being taxed as an S-Corporation! Whether you were previously a C-Corp, LLC, partnership, or sole proprietor, taking this step can open the door to significant tax savings and new opportunities for your business. However, with great tax benefits come new responsibilities. Here’s a guide to help you understand what this tax designation means, your new duties, and how to stay compliant.

What Does It Mean to Be an S-Corp?

An S-Corporation isn’t a business entity—it’s a tax designation. By electing S-Corp status (usually via Form 2553), your business can avoid double taxation, allowing corporate profits, losses, deductions, and credits to flow through to your personal tax return.

The key benefit? You only pay self-employment taxes (Social Security and Medicare) on your reasonable salary, not on the full profits of the business. But to enjoy these perks, you’ll need to follow specific IRS rules.

Your New Responsibilities as an S-Corp

Now that you’re operating as an S-Corp, here’s what you need to do to stay compliant:

1. Pay Yourself a Reasonable Salary

One of the most significant changes is that you, as an owner-employee, must now pay yourself a reasonable salary for the work you perform. This salary is subject to payroll taxes, just like any other employee.

• What is a reasonable salary?
  • It should reflect what someone in your industry would earn for a similar role, considering your duties, experience, and business revenue.
  • Resources like the Bureau of Labor Statistics or job postings for similar roles can help you benchmark your salary.

Pro Tip: A reasonable salary prevents the IRS from claiming you’re avoiding payroll taxes by taking only distributions.

2. Set Up Payroll

As an S-Corp owner-employee, you need to pay yourself through a formal payroll system. This ensures proper withholding for federal and state income taxes, Social Security, and Medicare. Here’s how to get started:

• Use a payroll provider like Gusto, ADP, or QuickBooks Payroll to automate:
  • Salary payments
  • Tax withholdings and filings
  • Year-end W-2 forms for yourself and any employees
• Obtain the required payroll tax accounts that your state requires. This usually means registering with your State's Department of Revenue (if your state has State Income tax) as well as your State's Department of Labor. 
• Pay yourself on a regular schedule (e.g., bi-weekly or monthly) to stay compliant.

3. File an 1120-S Annually

Your S-Corp is now required to file an 1120-S (U.S. Income Tax Return for an S Corporation) every year. This is separate from your personal tax return and reports the business’s income, deductions, and shareholder distributions.

• Key Points:
  • File Form 1120-S by March 15th (or apply for an extension using Form 7004).
  • You’ll also need to issue Schedule K-1 forms to all shareholders, which detail their share of the business’s income and expenses.

4. Stay on Top of Estimated Taxes

While your salary is subject to payroll tax withholding, you may still need to pay estimated quarterly taxes on your distributions. These payments cover federal income tax and any state taxes owed.

• Due dates: April 15th, June 15th, September 15th, and January 15th of the following year.
• Work with a tax professional to calculate these payments based on your salary and distributions.

5. Keep Detailed Records

Good recordkeeping is essential for staying compliant and making tax time easier. Key records to maintain include:

• Payroll records (salary payments, withholdings, tax filings)
• Business expenses (travel, office supplies, marketing)
• Shareholder distributions
• Annual meeting minutes (required in some states)

Using tools like QuickBooks or Xero can help you stay organized.

6. Comply with State Requirements

Your S-Corp may have additional state obligations, such as:

• Annual reports: Most states require S-Corps to file annual or biennial reports.
• Franchise taxes: Some states impose a minimum tax or fee on S-Corps, regardless of profits.
• State payroll taxes: Ensure your payroll provider accounts for state-specific tax requirements.

Check with your state’s Secretary of State office or Department of Revenue to understand your obligations.

Understanding Distributions

As an S-Corp, you can take profits out of the business as distributions, which are not subject to payroll taxes - The S-Corp's equivalent to Self-Employment Tax. However, you must pay yourself a reasonable salary first. Distributions typically show up on your Schedule K-1 and flow through to your personal tax return.

Pro Tip: Work with a tax professional to balance salary and distributions to maximize your tax savings while staying compliant.

What Happens If You Don’t Stay Compliant?

Failing to meet S-Corp requirements can result in:

• IRS audits or penalties
• Reclassification of your distributions as wages (subjecting them to payroll taxes)
• Loss of your S-Corp status

The good news? With the right systems in place, staying compliant is manageable—and the tax savings are worth it.

How Gilmer Ferretti Can Help

At Gilmer Ferretti, we specialize in helping business owners like you navigate the complexities of transitioning to an S-Corp. From determining a reasonable salary to setting up payroll and filing your 1120-S, we’ve got you covered. Our tailored approach ensures you maximize tax savings while staying on the IRS’s good side.

Take the Next Step

You’ve taken the leap to become an S-Corp—now it’s time to make sure you’re managing it effectively. Schedule a consultation with Gilmer Ferretti today, and let’s build a compliance and tax strategy that helps your business thrive.

With the right plan, your new S-Corp status can be a powerful tool for growing your business and protecting your bottom line. Let’s make it work for you!

Disclaimer:

This blog post is for informational purposes only and does not constitute legal, tax, or financial advice. Every business is unique, and tax laws vary by jurisdiction. You should consult with a qualified tax professional, accountant, or attorney to discuss your specific circumstances and ensure compliance with applicable laws and regulations. Gilmer Ferretti, LLC is not responsible for any actions taken or decisions made based on the information provided in this post.