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S Corporation C corporation has to file Form 2553 in order to be treated as an S Corporation. S corporations are flow-through entities whereby corporations elect to pass income, losses, deductions and credit through to their shareholders for federal and state tax purposes.
C corporation must meet five requirements to qualify as an S corporation:
- Must be a domestic corporation
- Only qualifying shareholders are permitted i.e. may not include partnerships, corporations or non- resident alien shareholders
- Limited to 100 shareholders
- One class of stock
- Must not be ineligible entity
Failure to File Penalty S Corporation that fail to file on time are subject to late filing penalty of $89 per shareholder per month.
Related Party Transactions
Fringe Benefits 2% shareholders are treated like partners i.e. fringe benefits paid to 2% shareholders are included as taxable income on shareholder's W?2. The amount of fringe benefit so included on W?2 is not subject to social security taxes.
Reasonable Compensation Since S corporations do not have to pay social security tax on the income that flows?through to the shareholders, therefore, IRS frequently reviews the salary of the shareholders to ensure that they are paying themselves reasonable amount of salary. If a shareholder is not taking out reasonable amount of salary, then the IRS can re?characterize a portion of the distribution as salary resulting in severe payroll tax penalties and interests.
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