When does the election have to be filed?
An S corporation election is made on Form 2553. The IRS instructions say it must be filed no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year before it. For a calendar-year business that wants S status from 1 January 2027, that means filing by 15 March 2027, or at any point during 2026.
The instructions tell you to mail or fax the original form to the IRS service center listed for your state and to keep proof of filing. The IRS says a corporation should generally receive a determination within 60 days, and that if you have not heard within 2 months of filing you should follow up.
Missed the window? Relief may be available under Rev. Proc. 2013-30 within 3 years and 75 days of the intended effective date, if there was reasonable cause. The details are on our page about late election relief.
Can a business with one owner be an S corporation?
Yes. There is no minimum number of shareholders. The IRS eligibility tests are a ceiling, not a floor: the corporation must be domestic, have no more than 100 shareholders, have only one class of stock, and have no nonresident alien shareholders, among other conditions.
A single-member LLC can make the election too. The Form 2553 instructions say an entity eligible to be treated as a corporation that meets the tests is treated as a corporation from the effective date of the S election and does not need to file Form 8832 separately. Massachusetts follows the federal classification, so an entity that is an S corporation federally is an S corporation for Massachusetts purposes as well.
What about my spouse?
For the 100-shareholder test, the IRS lets you treat an individual and his or her spouse, and their estates, as one shareholder. That matters mainly to larger family businesses, not to a one- or two-owner company.
The more practical questions are about work and payroll. If your spouse works in the business and is paid, those are wages like any other employee's. Massachusetts has specific family rules: the Department of Unemployment Assistance lists people working for their spouse as exempt employment for unemployment contributions, and the Paid Family and Medical Leave rules carve out businesses co-owned by family members and the wages of a spouse, minor child or parent. How those rules apply to your household is worth confirming before the first payroll rather than after.
What owners usually get wrong in the first year
- Treating the election as the finish line, when it starts payroll, a separate return and new state filings
- Taking money out as draws before any salary has been run
- Assuming the $456 Massachusetts minimum excise only applies to large companies; it applies to every S corporation
- Paying personal health insurance from a personal account and expecting the S corporation treatment to apply anyway
- Not tracking shareholder basis until a loss year makes it urgent
Each of these is a records problem before it is a tax problem, and each is easier to prevent than to repair.
How do I pay myself?
An owner who works in the business is an employee of the corporation. The IRS position, set out in fact sheet FS-2008-25, is that S corporations should treat payments for services to officers as wages and not as distributions. The IRS S corporation compensation page puts it this way: the corporation must pay reasonable compensation to a shareholder-employee for services before non-wage distributions may be made.
There is no percentage rule. The IRS says there are no specific guidelines for reasonable compensation in the Code or the Regulations, and lists the factors courts have looked at instead: training and experience, duties, time and effort, dividend history, pay to non-shareholder employees, timing and manner of bonuses, what comparable businesses pay, compensation agreements and the use of a formula. Any rule of thumb splitting profit into fixed shares of salary and distribution is folklore, not IRS guidance.
What happens if the business has a loss?
An S corporation's income, losses and deductions generally pass through to the shareholders on Schedule K-1 rather than being taxed to the corporation. A loss can therefore reach your personal return, but not without limits.
The 1120-S instructions walk through the limits that apply at the shareholder level, including the at-risk rules and the passive activity rules, and a loss can only be deducted to the extent of your basis in the corporation. That is why basis records matter even in a good year: the year you need them is usually the year something goes wrong.
Massachusetts reports each shareholder's share on its own Schedule SK-1 and applies its own rules, so check the state figures separately rather than assuming a federal loss produces the same result on Form 1.
What is basis, and why does anyone keep asking about it?
Basis is the running measure of your investment in the corporation. In general terms it goes up with the money you put in and the income passed through to you, and it comes down with distributions you take and losses passed through to you. It is the figure that decides whether a loss can be deducted and how a distribution is treated.
The corporation reports the items; tracking basis year to year is the shareholder's job. In practice that means keeping a schedule from the first year, not rebuilding one from old returns when a loss or a large distribution makes it urgent.
Does the S corporation pay my health insurance?
It can, with a specific treatment. For a shareholder owning more than 2%, the IRS says premiums paid by the S corporation are deductible by the corporation and included in the shareholder's W-2 wages in Box 1, but not in Boxes 3 and 5, so they are not subject to Social Security and Medicare tax. The shareholder may then be able to take an above-the-line deduction under Notice 2008-1, unless eligible for a subsidized plan through another employer, including a spouse's.
The mechanics matter. Under Notice 2008-1, a policy the shareholder buys and pays for personally, with no reimbursement by the corporation, does not qualify. The corporation has to pay or reimburse the premiums and report them on the W-2.
Quick reference
| Item | Federal | Massachusetts |
|---|---|---|
| Election | Form 2553, within 2 months and 15 days of the start of the tax year (15 March 2027 for calendar 2027) | Follows the federal election |
| Annual return | Form 1120-S, 15th day of the 3rd month: 16 March 2026 for tax year 2025, 15 March 2027 for tax year 2026 | Form 355S with Schedule S and an SK-1 per shareholder, same 15th-day rule; e-file required |
| Late return penalty | $255 per shareholder per month (2025 instructions); $260 for returns required to be filed in 2027 | Check current DOR penalty rules |
| Entity-level tax | Generally none on ordinary income | $456 minimum excise for every S corporation |
What about retirement contributions?
Once you are on payroll, retirement plan contributions for you are figured on compensation as the plan defines it. For an owner on an S corporation payroll, that is your salary, not the profit on your K-1. Distributions are not wages.
That makes the salary decision a retirement decision as well as a payroll tax one. A very low salary shrinks what can go into an employer plan; a salary set only with retirement in mind can cost more in payroll tax than it gains. Both effects belong in the same conversation.
Can I undo the election?
An S election stays in effect until it is terminated or revoked. It can end by revocation, or automatically if the corporation stops meeting the eligibility tests, for example by taking on an ineligible shareholder or a second class of stock.
Coming back is restricted. The Form 2553 instructions say IRS consent is generally required for a new election for any tax year before the 5th tax year after the first tax year in which the termination or revocation took effect. Treat the election as a multi-year decision, not a one-season experiment.
- Revocation or termination ends S status from the effective date
- A fresh election generally needs IRS consent until the 5th tax year after
- Massachusetts follows the federal status, so the state position changes with it
Where we come in
We prepare Form 1120-S and the Massachusetts 355S, keep the books that feed them, and talk through the salary, basis and health insurance questions before they become return problems. If you are still deciding, we can run the comparison with your actual numbers, and the readiness worksheet is a good place to start. We give you a scope and a price in writing before anything starts.
Figures on this page were checked against the IRS and Massachusetts sources listed alongside on 28 Sep 2026. They change — confirm the current amount before relying on one.
General information for owner-led businesses, not advice for your specific situation. Tax and accounting rules change, and how they apply depends on facts particular to your business. Talk to us — or to another qualified professional — before acting on anything here.
