S-Corporations: Election, Salary, and Basis
An S-corporation is a tax status, not a type of company. Corporations and LLCs can elect it, and once they do, profit passes through to the owners' personal returns while owners who work in the business receive a salary through payroll. The appeal is the possibility of reducing self-employment tax on profit beyond a reasonable salary. The price is a set of rules that demand consistent attention: eligibility limits, payroll, proportional distributions, basis tracking, and a separate tax return.
This hub follows the life cycle of an S-corp. Begin with the mechanics of getting in: the Form 2553 election guide covers deadlines, signatures, and late relief, and S-corp eligibility rules explains who can own shares and why a single class of stock matters. Owners still deciding whether to elect should read when to elect S-corp status in the entity hub.
The heart of running an S-corp is compensation. Reasonable compensation explains the standard the IRS applies, and setting your owner salary walks through a practical method and documentation. From there, payroll for owner-employees covers setup, deposits, and filings, while distributions explains how ownership returns are paid and why they must be proportional.
Two topics that owners often neglect deserve special attention. Shareholder basis determines how much loss you can deduct and how much cash you can take tax-free. Health insurance for owners has specific reporting rules that are easy to get wrong.
Finally, the Form 1120-S guide explains how the return works, and S-corp mistakes to avoid collects the recurring errors along with a monthly and yearly routine that prevents most of them. If you discover that your S-corp history is untidy, the entity cleanup guide describes a structured way to repair it.
All 10 guides in this topic
- How to Elect S-Corp Status: Form 2553 Step by StepWalk through Form 2553, the deadline, who must sign, how LLCs elect, the late election relief procedure, and what to do the day after the IRS accepts your election.
- S-Corp Eligibility Rules: Shareholders, Stock, and Entities That Can ElectLearn who can own S-corp stock, why one class of stock matters, which entities are excluded, and how businesses accidentally lose S status.
- S-Corp Reasonable Compensation: What the IRS Expects Owners to Pay ThemselvesWhat reasonable compensation means for S-corp owner-employees, the factors the IRS and courts weigh, red flags that invite scrutiny, and how to document your salary.
- How to Set Your Owner Salary in an S-Corp: A Practical MethodA step-by-step method for choosing an S-corp owner salary, with a worked example, documentation tips, and guidance on mid-year adjustments and bonuses.
- S-Corp Payroll for Owner-Employees: Setup, Withholding, and FilingsHow to put an S-corp owner on payroll, from EIN and state registration to withholding, deposits, quarterly returns, W-2s, and the common errors that trigger penalties.
- S-Corp Distributions Explained: Rules, Timing, and Tax TreatmentUnderstand how S-corp distributions work, why they must be proportional, how basis limits tax-free treatment, and how to avoid disguised compensation and second-class-of-stock issues.
- S-Corp Shareholder Basis: Stock Basis, Debt Basis, and Why It MattersA clear explanation of S-corp stock basis and debt basis, how income, losses, and distributions change them, and why basis limits deductions and taxable distributions.
- Health Insurance for S-Corp Owners: The 2-Percent Shareholder RulesHow S-corp health insurance works for shareholders who own more than 2 percent, including W-2 reporting, the personal deduction, HSA treatment, and common payroll mistakes.
- Form 1120-S Guide: How the S-Corp Tax Return WorksA plain-English tour of Form 1120-S, Schedule K-1, deadlines, extensions, penalties, and the records you need to gather before your preparer starts.
- Ten S-Corp Mistakes That Create Tax Problems (and How to Prevent Them)The most common S-corp errors, from no payroll and late filings to real estate in the S-corp and sloppy distributions, with a practical prevention checklist.
Not sure where to start? Browse the FAQ, look up terms in the glossary, or see the other topic hubs.