Form 2553
Learn how to fill out IRS Form 2553 and maximize your business benefits.
Why should I file a Form 2553 and classify as an S corporation?
Form 2553 is a tax form from the IRS. Some businesses can use it to become an S corporation for tax reasons.
The form must be filled out within two months and 15 days after the start of the business year that the change will begin. For most child care providers, the business year starts on January 1st. If this is true for your business, the form must be in by March 15th to be an S corporation for that year.
Being an S corporation is often the best choice for small businesses. It offers many tax advantages, benefits, and flexibility.
Pass-through taxation
Pass-through taxation means that the profits and losses of your business go directly to the owners' tax returns. Instead of the business paying taxes, the owners pay taxes on the business income as part of their own income. You will pay taxes on this money at your personal tax rate.
This is different from corporate taxation. With corporate taxation, the business pays federal income tax on its profits. Then, the owners also pay taxes on the profits they get from the business. This means the business profits are taxed twice.
If your business is an S corporation, you can use pass-through taxation. This lets you avoid the first tax on the business profits.
Reduction of self-employment tax
If your child care business is a sole proprietorship or a partnership, you probably pay self-employment tax. This tax covers your Social Security and Medicare payments.
As an S corporation, you must pay yourself a fair salary. This salary is subject to self-employment tax. Any extra money you earn above that salary can be called distributions. Distributions are payments from the business profits. These payments do not have self-employment tax.
It is important to know the difference between your fair salary and the distribution of profits. By paying yourself a fair salary and taking the rest of the money as distributions, you can lower your self-employment tax.
You must pay yourself a fair salary first. The IRS does not say how much this salary should be. Talk to a tax expert to make sure you follow the IRS rules.
Potential tax deductions
As an S corporation, you can subtract normal and needed business costs when figuring out your taxable income. Normal and needed costs are those that happen during regular business and are important for running the business. For example, deductible expenses for a child care business could be:
- Employee salaries and wages
- Rent or lease payments
- Utilities including electricity, water, and heating
- Advertising and marketing costs
- Meals and snacks for children
- Materials like toys, art supplies, books, etc.
Deducting expenses reduces your taxable income, which lowers the amount of taxes you’re paying. An S corporation’s expenses are deducted from profits before they’re paid to business owners. It’s important to keep proper records and documentation to support your deductions and consult with a tax professional to ensure that you remain in compliance with tax laws.
How do I fill out Form 2553?
Information Needed
To become an S corporation, you need to give information about the shareholders of your business. This includes their names, addresses, Social Security Numbers, and birth dates. You will also need to know what percent of the business they own. You must also get their permission to become an S corporation. If you are the only owner of your business, you only need to provide your own information.
You will also need to provide basic information about your business such as the Employer Identification Number, business name, and address.
Steps for Filing
To start, download and print a copy of the form from the IRS website.
Once you have the documents, go through the following steps to fill out Form 2553:
- Fill out the top section of the form: This includes your corporation's name, address, EIN, date of incorporation, and tax year.
- Indicate the effective date of the election: Indicate the date you want the S corporation election to take effect. This date can be no more than two months and 15 days after the beginning of the tax year in which the election is made.
- Indicate the type of corporation: Check the box indicating the type of corporation (domestic or foreign) and the type of entity (C corporation or other entity).
- Indicate the shareholders' consent: Check the box indicating that the shareholders have consented to the S corporation election and provide the date of the shareholder meeting where the consent was given.
- List the shareholders: List the names and addresses of all shareholders and the number of shares of stock they own.
- Provide other information: Provide any other information required by the form, such as the name and address of the corporation's principal officer.
- Sign and date the form: The form must be signed and dated by an authorized officer of the corporation.
- Submit the form: Submit the form to the IRS within 75 days of the date of incorporation or at the beginning of the tax year for which the election is to be effective.
What comes next?
Once you are classified as an S Corporation, you need to be mindful to complete all necessary steps to remain in compliance with the IRS to maintain your classification. To do so, you must:
- Hold regular shareholder meetings to remain in compliance with your incorporated status
- Maintain accurate corporate and financial records
- File annual tax returns
- Pay all owners a reasonable salary
- Ensure that shareholders report their portion of your business’s profits on the K-1 form
- Be aware of and comply with any state and local requirements
Above all, it is important to consult with a tax professional to ensure that filing out Form 2553 and electing to be classified as an S-corporation is the best choice for your business, and that they help ensure you are taking the proper steps to remain in compliance with your new S corporation status.
Disclaimer
The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.