Financial Glossary
Filing Form 2553 (S-Corp Election)
Form 2553 is the IRS election by which an eligible corporation or LLC chooses to be taxed as an S corporation, allowing income to pass through to owners rather than being taxed at the entity level. To file, the business completes the form with its identifying details, the requested effective date, and the consent and signatures of all shareholders, then submits it to the IRS by mail or fax. The election must be made within a defined window relative to the tax year for which it is to take effect.
Problem & Application
For profitable owner-operated businesses, electing S-corp status can reduce self-employment tax by splitting income between a reasonable salary and distributions, but only if the election is filed correctly and on time. Missing the filing window, leaving off a shareholder signature, or choosing the wrong effective date are common errors that delay the election by a full year. The decision should follow an analysis of whether the entity earns enough profit to justify the added payroll and compliance costs.
In Short
Filing Form 2553 is straightforward mechanically but unforgiving on timing and signatures, so the election deserves planning before it is mailed. Verify current deadlines and eligibility rules with the IRS, as they can change.