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§ S-CORPORATION TAX

BOCA RATON · UPDATED MAY 2026

S-Corporation tax, done as a specialty.

Form 1120-S, K-1 issuance, an annual reasonable-compensation memo with comparables, and a basis schedule we maintain year over year — not one of fifty entity types we sometimes touch.

(561) 334-4066

In short

S-Corporation tax includes the annual Form 1120-S return, Schedule K-1 issuance to each shareholder, an annual reasonable-compensation memo, and a maintained basis schedule. We handle it as a specialty — not as one of 50 different entity types we sometimes touch. Single-shareholder bundle (1120-S + owner 1040) is $950 — the personal return is included, no upcharge.

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§ 01

What an S-Corp actually is

An S-Corp is not an entity — it is a tax election. You form a corporation or LLC under state law, then file Form 2553 with the IRS to elect taxation under Subchapter S of the Internal Revenue Code. The deadline is 75 days from formation or from the start of the tax year you want the election to apply to. Once accepted, the entity itself pays no federal income tax. Instead, ordinary income, separately stated items, and credits flow through to shareholders on Schedule K-1 and are taxed on each shareholder's personal 1040. This flow-through structure is what produces the payroll-tax savings most owners associate with the S-Corp — but only when it is set up correctly, the right salary is documented, and the basis math is tracked. Get any of those three wrong and the IRS can disregard the election, recharacterize distributions as wages, or disallow losses. The election is the easy part. Living inside Subchapter S is the work.

§ 02

The reasonable compensation question

Reasonable compensation is the single most-litigated issue in S-Corp tax and the #1 reason the IRS challenges closely-held S-Corp returns. The rule: an S-Corp shareholder-employee must be paid a reasonable W-2 salary for the services they perform before any distributions are taken. Pay yourself $0 and take $200K in distributions and the IRS will recharacterize most of it as wages and assess back FICA, Medicare, and penalties. The leading cases — Watson v. Commissioner (8th Cir. 2012), Glass Block Unlimited, and McAlary v. Commissioner — established a nine-factor analysis that looks at training and experience, duties and responsibilities, time and effort devoted, comparable salaries paid for similar services, dividend history, payments to non-shareholder employees, timing and manner of bonuses, what comparable businesses pay, and use of a formula. We write an annual memo for each owner-client documenting these factors, citing comparables from BLS, RCReports, or industry surveys, and arriving at a defensible salary range. The memo is the contemporaneous documentation that defends the salary chosen — the IRS expects to see this kind of analysis when reasonable compensation comes under scrutiny.

§ 03

Basis tracking — stock + debt

Basis is the running ledger of how much you have invested in your S-Corp. Stock basis starts with what you paid in and is adjusted every year under IRC §1366 and §1367: increased by income items, decreased by distributions, then decreased by loss and deduction items. Debt basis is created when you personally loan money to the corporation (not when the corporation borrows from a bank). Basis governs two things. First, it determines how much of a loss you can deduct on your 1040 — losses in excess of basis are suspended until basis is restored. Second, it determines how much can be distributed tax-free; distributions in excess of basis are taxed as capital gain. Form 7203 has been required with the owner 1040 since 2021 and must be filed any time there is a loss, distribution, stock disposition, or loan repayment. We maintain stock and debt basis schedules year over year so the numbers are always there when you need to deduct a loss, take a distribution, or sell.

§ 04

Your two pay channels — W-2 + distributions

An S-Corp owner-employee receives money two ways, and the tax treatment is sharply different. The W-2 channel: a regular paycheck through formal payroll, subject to federal income tax withholding plus the full FICA (Social Security 12.4% on wages up to the annual base) and Medicare (2.9% with no cap, plus 0.9% Additional Medicare above $200K single / $250K joint). The distribution channel: a cash transfer from the corporation to the shareholder, recorded against basis. Distributions are subject to ordinary income tax via the K-1 flow-through, but they are not subject to self-employment tax, FICA, or Medicare. That gap — roughly 15.3% on the first ~$170K of wages and 3.8% above it — is the legitimate S-Corp savings. It only holds up if the W-2 salary is genuinely reasonable for the work performed. The reasonable-compensation memo is what defends the lever. Without it, the IRS can recharacterize distributions as wages under examination and you lose the savings plus penalties and interest.

§ 05

The K-1 and your personal return

The 1120-S does not produce a tax bill at the corporate level. It produces a Schedule K-1 for each shareholder, which then flows onto the shareholder's personal 1040 on Schedule E Part II. The K-1 reports ordinary business income, separately stated items (rental income, interest, dividends, capital gains, §1231 gains, §179 expense, charitable contributions, foreign taxes), the §199A QBI information needed to compute the 20% pass-through deduction, and the shareholder's share of distributions. We prepare the 1120-S and the owner's 1040 together because they are inseparable: the K-1 numbers, the basis worksheet, the §199A computation, and the underpayment-penalty analysis all interlock. Filing them with different preparers is how items get dropped — most commonly the §199A SSTB phaseout, the basis-limited loss carryover, and the QBI aggregation election. One firm, one workflow, one signature.

§ 06

Multi-state and PTET elections

Florida has no state income tax, which is one of the reasons S-Corps domicile here. But the analysis does not stop at the FL border. If your S-Corp earns income in another state — a sales rep in Georgia, a job site in North Carolina, a client base in New York — you likely have nexus there and must apportion income, file a non-resident state return, and either prepare a composite return for non-resident shareholders or have each shareholder file personally in that state. Roughly 33 states (per the AICPA/state tracker, current through 2024) now allow a Pass-Through Entity Tax election as a workaround to the federal $10,000 SALT cap: the S-Corp pays the state tax at the entity level (deductible federally as a business expense) and shareholders take a corresponding state credit. The election is annual, irrevocable for the year, and the deadlines and mechanics vary state by state. We run the PTET analysis on every multi-state owner-operator engagement and file the elections where the math works.

§ 07

Quarterly estimates on K-1 income

The W-2 portion of your S-Corp comp is covered by payroll withholding. The K-1 distribution portion is not. Federal income tax on flow-through K-1 income, plus the §199A interaction, plus state tax in any nexus state, all need to be paid in via quarterly estimates on Form 1040-ES. The due dates are April 15, June 15, September 15, and January 15 of the following year. Underpay and the IRS assesses the §6654 underpayment-of-estimated-tax penalty, which is computed quarterly using the IRS underpayment interest rate (8% annualized for most of 2024–2025). Safe-harbor protection requires paying in by withholding plus estimates either 90% of the current year liability or 100% of the prior year liability (110% if prior-year AGI exceeded $150K). We compute the estimate in April, June, September, and January based on year-to-date income and adjust the safe-harbor target as the K-1 forecast firms up — so the penalty never accrues and the April surprise never lands.

§ 08

When S-Corp doesn't work

An S-Corp election is not always the right answer, and we will tell you when. Four common situations where the math or the rules say no. First, sole proprietors with net SE income below roughly $60,000 — payroll setup, the 1120-S filing fee, reasonable comp memo, and annual basis maintenance often exceed the FICA savings at that income level. Second, rental real estate held directly inside an S-Corp — distributions of appreciated real estate trigger gain recognition under IRC §311(b), and you lose the ability to do a §1031 like-kind exchange of the asset out cleanly; an LLC taxed as a partnership or disregarded is almost always better for rentals. Third, foreign owners — IRC §1361(b)(1)(C) requires every shareholder to be a US citizen or resident alien; a single non-resident-alien owner disqualifies the entire election. Fourth, certain trusts — only specific trust types qualify (grantor trusts, QSSTs, ESBTs, voting trusts, testamentary trusts within the 2-year window); ownership by a non-qualifying trust kills the election immediately. We run the eligibility check before we file Form 2553, not after.

§ Pricing

Flat fees. No hourly surprises.

Flat fees quoted in writing before any work begins. S-Corp engagements bundle the 1120-S, K-1s, reasonable-comp memo, and basis schedule — not a la carte add-ons after the fact.

  • 1120-S + owner 1040 — single shareholder bundle

    Corporate return + personal 1040 included (no upcharge)

    $950

  • 1120-S — 2-5 shareholders

    Multi-owner, K-1 per shareholder (each owner 1040 separate)

    from $1,800

  • Annual reasonable-comp memo

    Nine-factor analysis with comparables

    $500

  • Basis schedule (annual maintenance)

    Stock + debt basis under §1366/§1367

    $300

  • Owner 1040 with K-1 (additional shareholders)

    Schedule E flow + §199A QBI — beyond the first owner

    from $450

  • Late S-election relief

    Rev. Proc. 2013-30 retroactive filing

    from $1,500

Multi-state returns and PTET elections are quoted per state. Bookkeeping, payroll, and IRS representation are separate engagements — see scope below.

§ Scope

What's included — and what isn't.

No surprises mid-engagement. Here's exactly what's in the standard scope, and what we'd bill separately or refer out.

Included

  • — Annual Form 1120-S preparation and e-file
  • — Schedule K-1 issuance to each shareholder
  • — Annual reasonable-compensation memo with documented comparables
  • — Stock and debt basis schedule maintained year over year (Form 7203)
  • — Owner's personal 1040 with K-1 flow-through (single owner; additional owners quoted separately)
  • — §199A QBI computation with SSTB phaseout analysis
  • — Quarterly estimated-tax computation on K-1 income (Form 1040-ES)
  • — Q4 planning call before December 31 to lock in the year

Outside our scope

  • — Monthly bookkeeping or QuickBooks cleanup — see Bookkeeping and QuickBooks Services
  • — Payroll processing for owner W-2 — see Payroll Services
  • — IRS examination defense — outside our practice scope; referred to a licensed IRS-representation firm if a return is selected for exam
  • — Multi-state PTET filings (quoted per state)
  • — Cost segregation studies — referred to engineering firms
  • — Estate planning documents (wills, trusts, operating-agreement drafting) — referred to attorneys

§ How this engagement works

The path from first call to delivered work.

  1. § 01

    Onboarding call

    A 60-minute call at no charge. We learn the business, review the entity structure, look at prior-year returns, and tell you honestly whether S-Corp is the right answer.

    60 min · no charge

  2. § 02

    Document intake + prior-year review

    Formation docs, EIN letter, prior-year 1120-S and 1040, current-year P&L and balance sheet, payroll YTD. We flag any prior-year issues before we begin.

    Week 1

  3. § 03

    Books cleanup if needed

    If the books are not close-ready, we scope a separate bookkeeping cleanup engagement. We do not paper over messy books to hit a deadline.

    As needed

  4. § 04

    Reasonable-comp memo

    Nine-factor analysis under the Watson framework with BLS and RCReports comparables. The memo lives in your file and we update it annually.

    Week 2-3

  5. § 05

    1120-S draft + K-1 issuance

    Federal return drafted, basis schedule updated under §1366/§1367, §199A QBI computed, K-1 issued to each shareholder. You review before we e-file.

    Week 3-4

  6. § 06

    Personal 1040 with K-1 flow-through

    Owner's 1040 prepared in the same workflow, Schedule E flow reconciled to the K-1, §199A applied, quarterly estimates set for the following year.

    Week 4-5

  7. § 07

    Q4 planning call

    Before December 31, we meet to lock in the year — retirement-plan funding, §179 timing, reasonable-comp truing-up, distributions vs. payroll for the final pay run.

    November-December

An S-Corp isn't a magic tax shelter — it's a legal structure with rules. We make the rules work in your favor, and we document the reasoning so the IRS can't unwind it.

— KDM Accounting

§ FAQ

Questions we hear about s-corporation tax.

What salary do I have to pay myself?

There is no statutory percentage or formula — the IRS standard is "reasonable compensation for services actually performed." In practice, we run a nine-factor analysis under the Watson framework using BLS occupational data, RCReports comparables, and industry survey data, then document the result in an annual memo. For most owner-operator service businesses, that lands somewhere between 30% and 60% of net business income, but the right number depends entirely on what you do, how many hours you put in, and what a non-owner employee would be paid for the same work. The memo is what defends the number if the IRS challenges it — see the reasonable-compensation section above.

Can my spouse be a shareholder?

Yes — a US-citizen or resident-alien spouse can be a shareholder. For S-Corp eligibility purposes under IRC §1361, a husband and wife (and their estates) count as a single shareholder, which helps you stay under the 100-shareholder ceiling. The practical question is whether they should be. If your spouse genuinely performs services for the business, they should be on payroll with their own W-2 and reasonable comp memo. If they do not perform services, putting them on payroll just to "split income" is exactly the kind of arrangement the IRS unwinds under examination. Adding a spouse as a passive shareholder is fine; paying a passive spouse a salary is not.

Should each partner have a separate S-Corp?

Usually no, but sometimes yes. A single S-Corp owned by two or three partners issues one K-1 per shareholder and is simpler to administer. The "tiered" structure — where each partner owns a personal S-Corp that then owns an interest in an operating LLC taxed as a partnership — is occasionally useful when partners have very different compensation needs, retirement-plan strategies, or fringe-benefit preferences. But the structure adds two more returns per year, basis tracking at two levels, and complicates the §199A QBI computation considerably. We run the math both ways on a partnership engagement and only recommend the tiered structure when it produces enough savings to justify the added cost and complexity.

What happens if I miss the S-election deadline?

The normal deadline for Form 2553 is 75 days from formation or from the start of the tax year. Miss it and you can usually still get retroactive relief under Rev. Proc. 2013-30, which the IRS routinely grants for entities that meet four conditions: intent to be an S-Corp from day one, failure to be treated as an S-Corp solely because of the untimely 2553, reasonable cause, and proper penalty-of-perjury statements. We file these every quarter and recover up to 3 years and 75 days of S-Corp treatment for clients who missed the original window. See Late S-Election Relief for the full process and worked example.

Can I S-Corp my rental properties?

Almost never a good idea. The classic problem: real estate appreciates, and IRC §311(b) treats a distribution of appreciated property from an S-Corp as a sale at fair market value — triggering gain recognition on the appreciation when you try to move the property out. You also lose the ability to do a clean §1031 like-kind exchange of the underlying asset. Rentals belong in an LLC taxed as a partnership (multi-member) or disregarded (single-member), which preserves basis flexibility, allows tax-free distributions of appreciated property, and keeps §1031 on the table. If you already have rentals stuck inside an S-Corp, the unwind is painful — we have done it, but the planning conversation should happen before the election, not after.

Do I need an LLC first, or can I form a corp directly?

Both work — the S-election is available to either a state-law LLC or a state-law corporation. We default to an LLC in Florida and elect S-Corp treatment via Form 2553, because the LLC structure gives you better operating-agreement flexibility, no required board or annual minutes, and a simpler dissolution path if you ever wind the entity down. If you have specific reasons to use a corporation — outside investors who require corporate stock, plans to convert to C-Corp later, or a state where the corporation form has a tax advantage — we will form a corporation directly. The S-election itself is the same Form 2553 either way.

What's the difference between an S-Corp and an LLC?

They are not the same kind of thing. An LLC is a state-law entity — it is how the entity exists legally. An S-Corp is a federal tax election — it is how the entity is taxed. A Florida LLC by default is taxed as a sole proprietorship (single-member) or partnership (multi-member). The owner can elect to have that LLC taxed as an S-Corp by filing Form 2553, without changing the legal structure at all. So the real question is not "LLC or S-Corp" — it is "should my LLC be taxed as a sole prop, a partnership, an S-Corp, or a C-Corp." For most owner-operator businesses earning more than ~$60K net, the S-Corp election on top of an LLC is the right answer. See section 1 above for the longer explanation.

§ Related services

Often paired with s-corporation tax.

§ Late S-Election Relief

Missed the 75-day S-Corp election deadline? Rev. Proc. 2013-30 allows retroactive Form 2553 relief up to 3 years and 75 days back. Flat-fee, specialist-handled. From $1,500.

See more

§ Tax Preparation

Tax preparation for individuals and businesses in Boca Raton and Fort Lauderdale. Federal and state returns, IRS e-file, year-round support.

See more

§ Tax Planning

Year-round tax planning for individuals and business owners in South Florida. Strategies that actually reduce what you pay — legally.

See more

§ QuickBooks Services

QuickBooks setup, training, cleanup, and ongoing support. ProAdvisor-certified for QuickBooks Online and QuickBooks Desktop.

See more

§ Payroll Services

Full-service payroll for Florida small businesses. Direct deposit, quarterly 941, annual 940, W-2s, 1099s, and reemployment tax.

See more

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