Choosing S-Corp For Your Virginia Business
When it comes to how your business is taxed by the IRS, the S-Corp tax election is a popular option. It can be applied to LLCs or corporations. However, it isn’t the best for every business and there are some restrictions. Below, we’ll take a look at what exactly the S-Corp tax election means, eligibility requirements, benefits for LLCs and corporations, and how we can help you can get this tax election applied to your business.
What is the S-Corp tax election?
The S-Corp tax election allows your business to pass its income, losses, deductions, and credits through to the owner(s) for IRS tax purposes. It changes how the money you make with your business is distributed and taxed as income. While the 15.3% self-employment tax can’t be completely avoided, the S-Corp tax election could help lower the amount of taxes you pay each year.
It’s a common misconception that S-Corp is an entity type, like an LLC or corporation, but it isn’t. The S-Corp tax election needs to be attached to an already existing LLC or corporation. So, your first step is to choose the entity type that’s right for your business needs. Next, submit your formation application to the Virginia Secretary of State to establish your business entity. After this, you can consider what tax election is right for you.
How to Qualify for the S-Corp Tax Election
In order to qualify for the S-Corp tax election, your entity members/shareholders and the entity itself must meet certain requirements.
| Qualifying Members/Shareholders: | Qualifying LLC or Corporation Entities: |
| Must be US citizens or permanent residents | Have under 100 total members/shareholders |
| Can be other single-member LLCs owned by US citizens/permanent residents | Have only one class of stock |
| Can be certain kinds of trusts or estates | Must be a domestic entity (formed in the US, not overseas) |
| Can NOT be other C-Corp status entities or Partnerships | Can NOT be certain financial, insurance, or banking corporations |
If you’re not sure if your members/shareholders or entity type qualifies for the S-Corp tax election, seek the advice of a business accountant or read more about the IRS S-Corp requirements on their website.
How to Claim S-Corp Status
The S-Corp application (IRS Form 2553) can be downloaded from the IRS website and needs to be submitted with wet signatures by mail (no digital signatures). Below is a list of information you will need to gather to complete the application successfully:
- The name of your LLC or corporation exactly as it appears on the Secretary of State record
- Entity formation date & state of domestic formation
- Your entity’s EIN (Employer Identification Number)
- Names, US addresses, & Social Security Numbers for each member or shareholder
- Percentage of ownership for each member or shareholder
- Fiscal year end date & date you want the S-Corp status to begin
- Real signatures (wet signatures) from each member or shareholder (digital signatures are not accepted by the IRS for S-Corp applications)
Once you form your Virginia LLC or corporation, the IRS requires you to submit the application for S-Corp status within 75 days of the formation date. This is so the tax election can take effect in your company’s first tax year. If you already have an established business and are past this 75 day deadline, you can submit the application late along with an explanation. Then, the S-Corp tax status will take effect at the beginning of the following tax year.
S-Corp Benefits for your Virginia Business
It’s always a good idea to save money when you are running your own business. Whether you’re just getting started, or you’ve been in the game for awhile, switching your tax status to S-Corp could lower the amount you pay in taxes each year.
For LLCs
By default, all LLC income is subject to the 15.3% self-employment tax. This changes a bit when you elect to be taxed as an S-Corp.
The money you make with your S-Corp business gets divided between your payroll (money paid to members/owners as a salary) and distributions (left-over profits). Each member’s salary must be what the IRS considers “reasonable compensation,” or a reasonable salary. This salary is subject to the 15.3% self-employment tax. Any distributions, however, would not be subject to self-employment tax.
For example, say you make $100,000 with your single-member LLC S-Corp in one tax year. If you had a reasonable salary of $60,000, you’d pay the 15.3% self-employment tax on that amount (instead of paying 15.3% on the entire $100,000). The remaining $40,000 could then be allocated as distribution.
For Corporations
By default, all corporations are C-Corps and “double-taxed” – at the entity level with the corporate income tax, and again at the shareholder level as individual income tax. The S-Corp tax status allows all income to pass through the entity to the shareholders, thereby avoiding the entity level corporate income tax. Choosing S-Corp for your corporation may be the best move if you plan on distributing most or all of your business’s income to shareholders.
S-Corp Status in Virginia
The Virginia Department of Taxation refers to entities filing as S-Corp as “Pass-Through Entities,” or PTEs. When it comes time to file your income taxes for the year, you will need to file Form 502 or Form 502PTET. If filling out tax forms, adding up deductions and credits, and calculating “reasonable salaries” isn’t your cup of tea, look for a business accountant in your area to help you for the first time.
Some states have separate tax rules for companies that choose S-Corp, but Virginia does not. So, no extra hoops to jump through when you choose S-Corp in Virginia! IRS Form 2553 is the only document you will need to submit for your business to be taxed as an S-Corp in this state. Not only can we help you form your business in Virginia, we can also complete and submit the S-Corp application for you!
Our S-Corp Filing Service
We can prepare and submit the S-Corp tax election application with your LLC or corporation formation order. Our top priority is making sure our clients have everything they need to get their Virginia business up and running! We offer complete business start-up services including:
- Registered Agent Service at $125 per year
- LLC and corporation formation filing
- Free standard Operating Agreements & Corporate By-Laws
- EIN filing
- S-Corp filing
- Business ID Package (website, domain, email addresses & more!)
- Mail Forwarding & Virtual Office addresses
If you have more questions, or would like a hand in getting your order started, we have local Virginia business experts standing by on the phone to help you. Give us a ring at 804-290-4330 anytime during regular business hours. Click the button below to get your business booming in Virginia!
S-Corp Tax FAQ
Choosing the S-Corp tax election for your Virginia business is a big decision, and of course you’re going to have more questions. Some of the most common questions are answered below. If you have more questions, give us a call!
The short answer is “No, it doesn’t.” Your LLC is the base for the S-Corp tax classification to rest on and the base doesn’t change. Your entity is still an LLC, but it will have some characteristics of a corporation when it comes time to pay salaries, make distributions, and pay taxes. You will still retain the less complicated management structure of an LLC.
Yes, it can… but only if it’s a qualified subsidiary company of an already established S-Corp. The IRS refers to this as a QSSS (Qualified Subchapter S Subsidiary). The parent S-Corp company must own 100% of the shares of the other S-Corp company (the subsidiary) in order for this to happen.
No, the S-Corp tax election never needs to be renewed. Once the IRS has approved your S-Corp tax election status, it is active for the entire life of your entity. So, as long as you keep your entity alive and in good standing with your state, all will be well!
To keep your Virginia entity alive:
In Virginia, corporations are required to file an Annual Report each year. The report is due annually by the last day of the 12th month after the entity was incorporated, or formed, with the Secretary of State’s office. So for example, if your incorporation date was March 15th, then your Annual Report would be due by the end of March each year. The amount due depends on the amount of authorized shares reported.
For Virginia LLCs, no annual report is due! However, they do have to pay an annual registration fee of $50 to continue doing business in Virginia. This is due by the end of the LLC’s formation anniversary month. So, if your LLC was formed with the VA Secretary of State on June 1st, then your annual registration fee would be due by the end of June 30th each year.
Technically, the IRS likes to see S-Corp tax election applications filed within the first 75 days of the tax year, so by March 15th each year. However, they realize that not everyone will file in time to meet that deadline, so as long as you submit the IRS Form 2553 for S-Corp tax election within 75 days of your entity’s formation date, that will do!
No, it is not too late! You can still apply to have your entity taxed as an S-Corp after you’ve passed the 75 day deadline, you will just need to also submit an explanation (or a good excuse) as to why your application is late. The procedure for filing late is laid out on the IRS website for Late Election Relief.
Take into consideration your training, experience, education, and what other people doing your job are typically paid. You can also ask yourself, “If I sold my company tomorrow, but still remained employed by it, what would I want to be paid or consider a fair salary?” When in doubt, review your salary assignments with a licensed business accountant.
The IRS does look more closely at businesses who choose the S-Corp tax election, making the chances of an audit a little higher. This is partly because of the “reasonable compensation” issue. Many of the audits for S-Corps surround business owners who assign themselves a lower salary in order to avoid paying more self-employment taxes. Consulting a business accountant when deciding salaries will relieve your worries, and help you and your business stay off the IRS radar.