S Corporation Election & Payroll
Should you even be an S corp?
Most S corp advice comes from people who have never seen your numbers. We run the arithmetic on your return and tell you what it says, including when the answer is no.
- We will tell you when it is not worth it
- Reasonable compensation study, quoted before we start
- Election, owner payroll and the 1120-S handled in one place
- Everything else quoted before we start
The Honest Version
The answer is sometimes no, and you should hear that out loud
The S corp has had a good few years online. Blogs say it saves thousands. Videos say you are throwing money away. None of them know your household income, your QBI position, or how much of your profit is really pay for your own labor.
We have talked people out of this, because the arithmetic came back flat. A flat result is not worth a second return, a monthly payroll and a new March deadline.
Send last year's return and a current profit figure. If the answer is stay where you are, that is what you will hear.
The Trade
What an S corp actually adds to your year
The side of the ledger free advice leaves out.
Payroll for the owner
You go on the books as an employee of your own company: quarterly 941s, a 940, a W-2 for yourself, state registrations.
A second tax return
The company files an 1120-S and issues you a K-1 that flows onto your 1040. Two returns, and they have to agree.
Reasonable compensation
The IRS expects the owner-employee to be paid a reasonable wage for the work actually done, before profit comes out.
A March 15 deadline
Due March 15, a month ahead of your personal return. The late-filing penalty is charged per shareholder, per month.
A Louisiana layer
Louisiana has not historically treated S corporations the way the federal rules do, and has its own elections around pass-through income. We check the state side first.
Paperwork you can break
Who can own the stock, how many owners, one class of stock. Break a rule by accident and the election can terminate.
The Louisiana treatment is what national advice gets wrong most often. We check the current state rules.
The Number Everyone Asks For
Where it usually starts to be worth a conversation
People want a threshold. The honest answer is a range. In the businesses we see, it starts being worth a conversation somewhere around $60,000 to $100,000 of net profit, and plenty of businesses inside that range should still leave things alone.
What moves it: other household income, QBI phase-outs, health insurance, retirement contributions, how much of the profit is pay for your own work, and the Louisiana treatment. Change one and the range moves. That is why we do not publish a single number.
Reasonable Compensation
What a reasonable compensation study is
As an S corp you pay yourself a reasonable wage for the work you actually do before taking profit as a distribution. A reasonable compensation study is a written, sourced determination of that wage. It is quoted before we start.
What it produces:
- A specific salary figure, not a rule of thumb and not a percentage.
- The duties and hours it is based on, in your words, written down.
- Comparable wage data for the work, with the sources named.
- A dated report you can hand to an examiner.
Why the IRS cares: payroll tax is calculated on the wage, not the distribution. Set it too low and distributions start to look like wages. The study documents the figure at the time you set it.
Fixing Things
Late elections and broken ones
You meant to elect and never filed. Missing the Form 2553 window does not end the conversation. Relief exists where you intended to be an S corporation from that date, you have reasonable cause, and you are generally within three years and 75 days.
You are an S corp and something went wrong. Elections break quietly: stock moves to an owner who is not eligible, or distributions go out unevenly and look like a second class of stock. The election can be treated as terminated, sometimes retroactively.
Relief for inadvertent terminations exists, but it is slow and expensive. The cheap version is the one you catch in the same year.
Questions
What people ask before they decide
Is it ever the wrong answer?
Often. If the profit is not there yet, if it is mostly a return on capital rather than your own work, or if payroll and a second return cost more than the change is worth, the answer is no.
I missed the deadline to elect. Is it too late?
Not necessarily. There is a relief procedure where the entity intended to be an S corporation from the requested date, has reasonable cause, and is generally within three years and 75 days of it. It is filed on Form 2553 with the relief language attached.
What is a reasonable compensation study?
A written, sourced determination of your owner salary, based on your role, hours and comparable wage data, in a format you can hand to an examiner. Quoted before we start.
What does the rest of it cost?
Quoted before we start. The election, the payroll setup and the 1120-S are scoped once we have seen your numbers.
Related reading
Start Here
What happens when you call
- A person answers. Not a menu, not a call center.
- We ask what is filed and what is not, and what the business actually made last year.
- The first step is sending bank statements and last year's return. That is all.
- We quote before we start, so you see the scope and the price before any work begins.
- We reply within one business day.
Or call the office: 504-832-1873
708 Rosa Ave, Metairie, LA 70005
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