S Corporation Common Mistakes and Pitfalls

S Corporations are huge benefit to some small business owners and in many cases we highly recommend them.

There are some serious pitfalls with s corporation taxes, however, that can cause you a lot of stress if you do not deal with them properly.

Disclaimer: The information presented on this website is only a basic introduction to s corporation and partnership taxes. We strongly recommend that you hire a professional to help you. The information provided here does not replace the IRS instructions for filing taxes. Incorrect filings could lead to large tax bills and penalties. Please hire a CPA or an EA to prepare and file your tax returns.

S corporation mistake #1: Late election

An s corporation is not an entity type but an election. To be treated as an s corp, this election must be made within 75 days of entity formation or the beginning of the year.

Many of those forming a new business make the mistake of waiting until the end of the tax year to make the election – but by then it is too late.

If you messed up and did not do this, you can still attempt a late election if you have reasonable cause. If you would like help with this contact us here.

S corporation mistake #2: Filing a late income tax return

Ouch, the penalties. You are looking at $195 per shareholder, per month (up to 12 months).

This is if you do not file on time – even if you do not have any net profit. Also, the s corporation due dates are usually a month ahead of the regular tax return due dates.

If you end up with this penalty this is something we can maybe help you with as well.

S corporation mistake #3: Not running payroll (when required)

The IRS and the tax court have made it clear that S corporation shareholders (owners) that provide anything more than minor services for the business must be paid a reasonable salary.

You can just do all of the work for your company and take all of the profit as a corporate distribution to shareholders. You are required to officially run payroll and pay employment taxes.

Running payroll requires tax withholding, periodic tax deposits, payroll tax return filing, unemployment tax filings, and more.

By skipping this and showing a net profit from operations, you are not in compliance and this can lead to a troublesome and expensive situation involving a multi-year catch-up on payroll requirements.

S corporations are very often a great choice, especially for a moderately profitable small business, but if you do not comply with these three issues, you could be setting yourself up for some big headaches.

For more information on s corporations, see our guide here.

If you wish to hire us to help you with your s corporation requirements and taxes, please contact us here.

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