S Corp Tax Election: Filing Requirements, Deadlines, and Common Mistakes

Electing S Corporation (S Corp) status offers tax advantages by avoiding double taxation. Instead of the company paying corporate income tax, profits and losses pass through to shareholders, who report them on their individual tax returns. However, the election process requires strict compliance with IRS rules and deadlines. Errors can cause delays or rejection, leading to unexpected tax consequences.

Filing Requirements

To qualify for S Corporation status, a business must meet IRS criteria. It must be a domestic corporation, have no more than 100 shareholders, and issue only one class of stock. Shareholders must be individuals, certain trusts, or estates—partnerships, corporations, and non-resident aliens are not allowed.

Once eligibility is confirmed, the business must file Form 2553, “Election by a Small Business Corporation,” with the IRS. This form requires the corporation’s name, Employer Identification Number (EIN), tax year, and signatures from all shareholders. Missing signatures or incorrect information can result in rejection.

Businesses operating on a fiscal tax year instead of a calendar year must provide a valid reason and may need to file Form 8716, “Election to Have a Tax Year Other Than a Required Tax Year.” If a shareholder is an eligible trust, the corporation must submit proof of its qualification.

Timeline and Deadlines

To be treated as an S Corp for a given tax year, Form 2553 must be filed within two months and 15 days after the start of that tax year. For calendar-year businesses, this means a deadline of March 15. Missing this date usually delays the election until the next tax year unless the company qualifies for late election relief.

Newly incorporated businesses can file Form 2553 at any point during their first tax year, as long as it is submitted within two months and 15 days of formation. This allows startups to secure S Corp status without waiting until the next tax year.

Late election relief is available under IRS Revenue Procedure 2013-30 if a company can show reasonable cause for missing the deadline. The IRS generally grants relief if the company has consistently filed tax returns as an S Corp and shareholders have reported income accordingly.

Impact on Tax Returns

Electing S Corporation status changes how a business reports income. Unlike traditional corporations that pay corporate income tax, an S Corp is a pass-through entity, meaning profits and losses flow to shareholders based on their ownership percentage. Shareholders must report their share of business income on personal tax returns, even if no distributions are made.

S Corps file Form 1120-S, which details revenue, expenses, and deductions. This tax return includes Schedule K-1, which breaks down each shareholder’s portion of the earnings. Shareholders report this information on their personal tax returns using Schedule E.

A key advantage of S Corp taxation is how it treats self-employment taxes. Sole proprietors and partnerships pay Social Security and Medicare taxes (15.3%) on all business income, but S Corp shareholders only pay these taxes on their salary, not on their share of company profits. However, the IRS requires shareholder-employees to take a “reasonable” salary, which must be reported on Form W-2 and is subject to payroll taxes. If the salary is too low relative to company earnings, the IRS may reclassify distributions as wages, triggering additional taxes and penalties.

Common Errors Leading to Election Rejection

Many businesses jeopardize their S Corporation election by overlooking technical filing details. A frequent mistake is submitting Form 2553 with missing or incorrect information, such as an inaccurate EIN or a corporate name that does not match IRS records. Even minor clerical errors can cause rejection.

Another common issue is failing to obtain unanimous shareholder consent. The IRS requires all shareholders to sign Form 2553, and missing signatures can invalidate the application. This often happens in corporations with multiple owners where communication lapses result in incomplete documentation. Changes in ownership before the election is processed can also create complications if new shareholders have not provided consent.

Some businesses disqualify themselves by violating ownership restrictions after submitting their election. Issuing stock to an ineligible entity, such as a partnership or a non-resident alien, automatically terminates S Corp status. Exceeding the 100-shareholder limit before approval also nullifies the election, requiring the business to operate under standard corporate tax rules.

Revoking or Changing the Election

Some businesses later find that S Corporation status no longer aligns with their financial goals or operational structure. Corporations can revoke or modify their election due to changes in ownership, shifts in tax strategy, or compliance issues.

To voluntarily revoke S Corp status, the corporation must submit a written statement to the IRS signed by shareholders holding more than 50% of the company’s stock. This statement must include the corporation’s name, EIN, and the effective date of revocation. If a business wants the revocation to take effect at the beginning of a tax year, it must file the request by the 15th day of the third month of that year. Otherwise, the revocation takes effect on the date specified in the statement or, if no date is provided, the date the IRS receives the request. Once revoked, the corporation reverts to C Corporation taxation, meaning it will be subject to corporate income tax and potential double taxation on dividends.

In some cases, businesses may not wish to fully revoke their election but need to correct an inadvertent termination. If an S Corp violates eligibility requirements—such as issuing a second class of stock or accepting an ineligible shareholder—the IRS may allow the company to retain its status if the violation was unintentional and promptly corrected. The corporation must submit a request for relief under IRS Revenue Procedure 2013-30, explaining the violation and corrective actions taken. If approved, the S Corp election remains intact, preventing unexpected tax liabilities associated with a termination.