Kelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist c.
Kelly Main Staff ReviewerKelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist c.
Written By Kelly Main Staff ReviewerKelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist c.
Kelly Main Staff ReviewerKelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist c.
Staff Reviewer Rob Watts Managing Editor, SMBWith over a decade of editorial experience, Rob Watts breaks down complex topics for small businesses that want to grow and succeed. His work has been featured in outlets such as Keypoint Intelligence, FitSmallBusiness and PCMag.
Rob Watts Managing Editor, SMBWith over a decade of editorial experience, Rob Watts breaks down complex topics for small businesses that want to grow and succeed. His work has been featured in outlets such as Keypoint Intelligence, FitSmallBusiness and PCMag.
Rob Watts Managing Editor, SMBWith over a decade of editorial experience, Rob Watts breaks down complex topics for small businesses that want to grow and succeed. His work has been featured in outlets such as Keypoint Intelligence, FitSmallBusiness and PCMag.
Rob Watts Managing Editor, SMBWith over a decade of editorial experience, Rob Watts breaks down complex topics for small businesses that want to grow and succeed. His work has been featured in outlets such as Keypoint Intelligence, FitSmallBusiness and PCMag.
| Managing Editor, SMB
Updated: Apr 17, 2024, 11:58am
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The United States tax system affords small business owners a great deal of flexibility when it comes to paying taxes. Small business owners can pick and choose how they want to pay taxes, minimizing their taxable income and acting more strategically. One way they can do this is by filing their taxes as an S-corp. To do this, they must fill out Form 2553.
But all this flexibility comes from within an incredibly rigid and convoluted bureaucratic system. Navigating that system can be tricky, and one false step can have dire consequences, including back taxes, fines and, in extreme cases, jail time. Therefore, it’s very important that all paperwork is filled out correctly and filed on time. Below, we provide simple Form 2553 instructions, so you can enjoy the tax benefits that come with filing as an S-corp.
Form 2553 is used by C-corporations and limited liability companies (LLCs) that want to file taxes as an S-corp. Why would they want to file as an S-corp rather than as an ordinary corporation or LLC? Part of the reason is strategy. The other part is the tax burden. If your goal is growing the business, then you want to reinvest as much of your earnings as possible. But if your business is generating a great deal of profit—profit you’d like to put in your pocket—then filing as an S-corp is the way to go.
Traditional C-corps pay corporate income tax on profits. If those profits are distributed to shareholders, each shareholder pays personal income tax on the amount they receive. 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.
An S-corp has a pass-through tax structure. It doesn’t pay corporate income tax. Instead, company profits “pass through” to the owners (shareholders). Owners report their share of company earnings on their personal tax returns, and they pay tax at their personal tax rates.
LLC owners typically have a different reason for filing a Form 2553 S-corp election. Under the default LLC tax structure, owners who work in the business are self-employed and report their share of LLC income and expenses on their personal tax returns. They also pay self-employment (Medicare and Social Security) taxes on the full amount of the LLC’s profits.
When filing as an S-corp, it’s easier for LLC owners to extract profits from the company while reducing their self-employment tax burden. When filed as an S-corp, owners earn a traditional salary and receive “distributions” at specified times throughout the year. Owners pay income, Social Security and Medicare taxes on their ordinary salary. However, owners pay only income taxes on distributions—Social Security and Medicare taxes are not collected.
Before you prepare any paperwork, you first need to verify if your business is qualified to file as an S-corp. All of the following conditions must be true in order to file Form 2553:
Once you’ve determined that you are eligible to apply, you also have to make sure that filing as an S-corp is viable. Keep in mind that there are costs that come with filing Form 2553. It doesn’t make sense to spend X on tax services to reduce your tax burden by Y, when X is greater than Y.
You also have to make sure that you can file the form before the due date, which is no more than two months and 15 days after the beginning of the tax year the election is to take effect or any time in the tax year preceding the tax year that the form will take effect. 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.
Preparing Form 2553 can be a very time-consuming task. In the Instructions for Form 2553, the IRS estimates that businesses filing Form 2553 will spend about ten hours on record keeping, two-and-a-half hours learning about the law or the form, and a hair over four hours preparing and sending the form to the IRS.
Once you’ve determined that you are qualified to file as an S-corp and you have the requisite time to file the paperwork before the deadline (or show reasonable cause for why you’re filing late), it’s a matter of actually filling out and submitting the paperwork to the IRS.
Form 2553 is made up of four parts, each of which deals with specific types of information. Let’s explore the form together.
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). You will also have to provide the IRS with the Effective Date of Election, a list of all shareholders and shares they own, and signatures from a corporate officer and all shareholders.
Part II is for those who checked box “2” or “4” in Part I, Item F, indicating a fiscal tax year or a 52- to 53-week tax year not ending in December. If you’re required to complete this section, then you should consult with a tax professional, as it is quite complicated.
Part III of Form 2553 is specifically for qualified subchapter S trusts (QSST). For those who are required to complete Part III, keep in mind that you must make the election in Part I, as Part III of Form 2553 cannot be submitted on its own.
Part IV of Form 2253 is for businesses where “the corporate classification election intended to be effective on the same date that a late S-corporation election was intended to be effective.”
Once Form 2553 is completed, you must submit it to one of two locations, depending on where you are filing.
Those filing in Connecticut, Delaware, District of Columbia, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia or Wisconsin will send the form to the IRS at the Department of Treasury office in Kansas City, Missouri.
Those filing in Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington or Wyoming will send their forms to the IRS at the Department of Treasury in Ogden, Utah.
