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Electing S-Corporation (S-Corp) status provides significant tax and liability benefits, but it also comes with ongoing compliance requirements. To maintain your S-Corp designation and avoid IRS penalties, business owners must follow specific rules related to payroll, tax filings, and recordkeeping.

1. Pay Yourself a Reasonable Salary

S-Corp owners who actively work in the business are considered owner-employees.

• You must pay yourself a reasonable salary that reflects market rates for similar roles.

• This salary is subject to payroll taxes (Social Security and Medicare).

• Paying an unreasonably low salary to avoid payroll taxes is a red flag for the IRS and may trigger an audit.

2. Handle Payroll and Employment Taxes

As an S-Corp, you are responsible for running payroll properly:

• Withhold federal income tax, Social Security, and Medicare from your salary.

• Pay the employer portion of Social Security and Medicare taxes.

• File the necessary quarterly and annual payroll tax returns (Forms 941, 940, W-2, and W-3).

Many S-Corp owners use payroll software or outsource payroll to ensure accuracy and compliance.

3. File Form 1120-S Annually

Every year, an S-Corp must file Form 1120-S (U.S. Income Tax Return for an S Corporation). This form reports:

• Business income

• Deductions

• Credits

In addition, you must issue Schedule K-1s to each shareholder, showing their share of the company’s income or loss. Shareholders then report this information on their personal tax returns.

4. Maintain Proper Records

Ongoing recordkeeping is essential for compliance and transparency. This includes:

• Documenting salary payments and profit distributions

• Keeping accurate financial records and receipts

• Recording major company decisions with meeting minutes (recommended, even for single-owner S-Corps)

5. Comply With State Requirements

Each state has its own compliance rules for corporations and LLCs taxed as S-Corps. Depending on your state, you may be required to:

• File an annual report

• Pay a state franchise tax or annual fee

• Maintain a registered agent and updated business address

Failing to meet state requirements can result in penalties or even the loss of good standing status.

Conclusion

After electing S-Corp status, your business must meet several ongoing obligations, including paying yourself a reasonable salary, handling payroll taxes, filing Form 1120-S and Schedule K-1s, maintaining corporate records, and complying with state-specific requirements.

Staying on top of these responsibilities ensures your S-Corp remains compliant and allows you to continue enjoying the tax and liability benefits it provides. For peace of mind, consider working with a CPA, payroll provider, or tax professional who specializes in S-Corps.