If your business has had a strong year and you’re wondering whether to elect S corporation status for 2027, the fall is a good time to talk it through. The election itself is one IRS form, but it comes with a firm deadline and a few real changes to how you pay yourself and what you file.
We usually raise it in the year-end tax planning meeting, because that’s when we can see what the business actually earned this year and what next year is likely to look like. The decision for S Corp election deadlines is a lot easier to make in October or November than it is in the middle of tax season.
An S Corp Election Changes How the IRS Taxes Your Business
An S corporation election is a choice about how the IRS taxes your business. Your LLC or corporation stays the same legal entity under state law, and you file Form 2553 to have it taxed as an S corporation from the date the election takes effect.
When I explain it to clients, I start with self-employment tax. If you’re running a single-member LLC, the business profit is generally subject to self-employment tax. With an S corp, you pay yourself a reasonable wage through payroll, and the profit you take out on top of that comes to you as a distribution instead of wages. The way I’ve put it to clients is that the IRS knows there’s a benefit here, and it will let you take advantage of it a little bit, but it doesn’t want you to take advantage of it completely.
That’s the reason the election can lower your taxes, and it’s also why it only makes sense once the savings outweigh the extra cost and administration. We look at that with each client’s real numbers before anyone files anything, and once the answer is yes, the timing comes down to one IRS deadline.
When Is the Deadline to File Form 2553?
According to the IRS instructions for Form 2553, the form has to be filed no more than 2 months and 15 days after the beginning of the tax year you want the election to start. You can also file it any time during the tax year before that. For a business on a calendar year, the IRS’s own example works out to March 15. So if you want S corporation treatment for all of 2027, you can file any time between now and March 15, 2027.
A brand-new business works a little differently, because the clock starts on the day its first tax year begins. The IRS example uses a company whose first tax year starts on January 7, which gives it until March 21 to file for that first year.
If the form goes in after the window has closed, the IRS treats the election as made for the following tax year. So a business that files in April would get S corporation treatment starting the next January, and the current year stays taxed the old way.
Certified Mail Saved One Client’s S Corp Election
We had a client come to us from another accountant, and her S corp returns kept getting rejected when they were e-filed. The IRS said the type of entity being filed didn’t match what it had on record. Her previous accountant paper filed the returns and moved on, so nobody ever asked why they didn’t match.
When we took over, our first return for her was rejected too. Once we dug in, we found that the IRS still had her business on record as a single-member LLC and had no S election on file at all. So we filed the election for her, and we sent it by certified mail ahead of the deadline.
The IRS then said it hadn’t received the election in time and disallowed it. That would have made her S corp return invalid, and she would have had to refile as a sole proprietor and pay the self-employment tax the S corp had been saving her. With the IRS, you’re kind of guilty until proven innocent, so we sent our response along with the certified mail receipt, and it was accepted. I’m so glad we had that receipt, because the IRS sometimes does things like this.
That’s why we treat the filing details as part of the job. The IRS lists a certified or registered mail receipt with a timely postmark as acceptable proof that Form 2553 was filed, and every shareholder has to sign the form. You should generally hear back within 60 days, and if you haven’t heard anything within 2 months, it’s time to follow up. The acceptance comes as a CP261 notice, which the IRS says to keep in your permanent records.
What If You Already Missed the S Corp Deadline?
There is a relief process for late elections under Revenue Procedure 2013-30. In general, the late Form 2553 has to be filed within 3 years and 75 days of the date you wanted the election to start. The business also needs reasonable cause for missing the deadline, and it has to have acted diligently to fix the mistake once it found it.
Every shareholder from that period also has to provide a statement that they reported their income on their returns consistent with S corporation treatment. The form gets a specific notation at the top showing it’s filed under that revenue procedure, along with an explanation of why it was late.
It’s a real option, but it is still paperwork plus an explanation the IRS has to accept, so we would much rather get the election filed on time in the first place. Once it’s in, the next question is what you pay yourself.
Reasonable Salary Comes Before S Corp Distributions
Once the election is in place, if you work in the business, you’re an employee of your own company. The IRS is clear that an S corporation has to pay reasonable compensation to a shareholder-employee for their services before it makes non-wage distributions.
What the IRS wants to know is that you’re paying yourself a fair wage, the kind you would pay somebody else to do what you do. Among the factors it lists are your duties in the business and what comparable businesses pay for similar services. I usually advise clients not to get too aggressive with that number.
With our more established S corp clients, we’ll often set the salary to cover a baseline of living expenses, and then they take regular distributions every month on top of it.
Getting that balance right ties straight into cash flow, which is why we work through it as part of our fractional CFO and advisory services and revisit it in our regular review meetings.
Payroll and Filings Change After the S Corp Election
The other side of the election is the added work. Once you make the election and you work in the business, you also have to run payroll, and the S corp files its own tax return, so there are some extra costs that come with it.
In practice, that means running payroll for yourself and filing Form 941 to report the withholding and payroll taxes. The business files Form 1120-S by the 15th day of the 3rd month after its tax year ends, and each shareholder gets a Schedule K-1 to report on their personal return. For a calendar-year business, that puts the business return in March, ahead of the personal returns in April.
It’s also worth knowing that an S corp election isn’t a quick switch to flip back and forth. If the election ends, IRS consent is generally required to elect again before the 5th tax year after the year the termination took effect. When a client recently asked us whether to keep their S corp while they were restructuring their business, the first thing we asked was how much income they realistically expected it to earn going forward.
Planning the S Corp Election Into Your Year
For us, an S corp election is part of the tax planning we do with clients throughout the year, and I don’t recommend doing that planning any less than twice a year, once around April and once before the end of the year. The point of an ongoing relationship is that we’re keeping up to date all year, so a decision like this never gets squeezed into tax season.
If you’re weighing the election for 2027, a fall review gives us time to run the numbers and get payroll set up well before March 15, 2027. It’s part of the tax planning and strategy work we do with every client.
If you’re still deciding which structure fits your business, we wrote more about it in LLC vs. S Corp vs. C Corp.
If you’d like to talk through whether an S corp election makes sense for you next year, reach out to us and we’ll set up a time.
Until next time!
This content is for educational purposes only. Tax situations vary, so consult a qualified tax professional for advice specific to your situation before filing Form 2553.
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