S Corp Election Guide California

What Is the S Corp Election?

The S corporation election is a tax status election that allows a corporation or LLC to be taxed as a pass-through entity while splitting income between salary (subject to payroll taxes) and distributions (not subject to payroll taxes). The election is made by filing Form 2553 with the IRS. It is not a change in legal entity type — the underlying LLC or corporation remains the same. Only the tax treatment changes.

S Corp Eligibility Requirements

To qualify for S corp status, the entity must: (1) Be a domestic corporation or LLC. (2) Have no more than 100 shareholders. (3) Have only one class of stock. (4) Have only eligible shareholders — U.S. citizens or permanent residents, estates, certain trusts, and tax-exempt organizations. Partnerships, corporations, and non-resident aliens cannot be S corp shareholders. (5) Not be a financial institution, insurance company, or international sales corporation. Most small California businesses easily meet these requirements.

How to Elect S Corp Status

To elect S corp status: (1) File Form 2553 (Election by a Small Business Corporation) with the IRS. All shareholders must sign the form. (2) If the entity is an LLC, first file Form 8832 to elect corporate tax treatment, then file Form 2553. (3) File California Form 3560 (S Corporation Election or Termination/Revocation) with the FTB. (4) Set up payroll for the owner-employee — the S corp must pay the owner a reasonable salary before taking distributions. KDA handles the complete S corp election process for clients.

California S Corp Election (Form 3560)

California requires a separate S corp election — the federal election does not automatically apply in California. California Form 3560 must be filed with the FTB. California S corps pay a 1.5% franchise tax on California net income (minimum $800). California also requires S corp owners to pay themselves a reasonable salary, consistent with the federal requirement. KDA files both the federal and California S corp elections simultaneously to ensure both are effective for the same tax year.

S Corp Election Deadlines

For the election to be effective for the current tax year: the election must be filed by March 15 of the current year (for calendar-year taxpayers) or within 2 months and 15 days of the beginning of the tax year. For a new entity, the election must be filed within 2 months and 15 days of the entity's formation date to be effective for the first tax year. Late elections can sometimes be made retroactively — the IRS has a simplified procedure for granting relief for late S corp elections if the entity meets the eligibility requirements and has been filing as if it were an S corp.

What Happens After the Election

After the S corp election is effective: (1) Set up payroll and pay the owner-employee a reasonable salary. (2) File Form 1120-S (U.S. Income Tax Return for an S Corporation) annually. (3) Issue Schedule K-1 to each shareholder showing their share of income, deductions, and credits. (4) File California Form 100S annually. (5) Make quarterly estimated tax payments. KDA provides ongoing S corp tax compliance services, including payroll setup, annual returns, and K-1 preparation.