S-Corporations in the New Year (Part Two): What to Do After Your Election Is Approved

Making an S-corporation election is only the first step. Once the IRS processes and accepts the election, the real work begins: setting up payroll, following distribution rules, and staying compliant at the federal, state, and local levels.

This follow-up article walks through what business owners should do after the election is effective, and the ongoing rules they must follow to keep their S-corporation in good standing.

Step One: Confirm the Election Was Accepted

After filing IRS Form 2553, the IRS will issue a written acceptance notice confirming the entity’s S-corporation status and the effective date of the election. This confirmation matters. Keep it with your permanent company records and provide a copy to your CPA and payroll provider. Until the election is accepted, you should not change how you run payroll or distributions.

FEDERAL-LEVEL REQUIREMENTS

Reasonable Salary and Payroll Setup

Once your S-corporation is active, any owner who provides services to the business must be paid a reasonable salary as a W-2 employee. This requires:

• Registering for federal payroll tax accounts if not already done

• Running regular payroll (monthly, biweekly, or otherwise)

• Withholding and remitting federal income tax, Social Security, and Medicare

Paying no salary—or an unreasonably low one—is one of the most common S-corp compliance errors.

Payroll Tax Filings

At the federal level, an S-corporation must:

• File Form 941 (quarterly payroll tax returns)

• File Form 940 (annual FUTA return, if applicable)

• Issue W-2s to employees (including owner-employees)

• File W-3 with the Social Security Administration

Most businesses use a payroll service to handle these filings, but responsibility ultimately remains with the business owner.

State and Local Payroll Obligations

State and local compliance depends on where the business operates and where employees are located. Typically, this includes:

• State income tax withholding registrations

• State unemployment insurance

• Local or municipal payroll taxes, if applicable

• Workers’ compensation coverage

If you move states or operate in more than one state, payroll compliance can change quickly and should be reviewed before continuing payroll.

Distributions: How Owners Get Paid Beyond Payroll

What Distributions Are—and Are Not

Distributions are how owners receive profits after paying themselves a reasonable salary.

However, you should be mindful that distributions are not wages, they should not be run through payroll, they must be properly documented, they generally must be pro rata and follow ownership percentages.

Distributions are usually taken periodically—monthly, quarterly, or annually—depending on cash flow and accounting practices.

Tracking Distributions Correctly

Good bookkeeping matters. S-corporations should track salary separately from distributions, avoid commingling personal and business funds, and maintain accurate capital and basis records.

Improper distribution tracking can create tax issues, especially when profits fluctuate or ownership changes.

Accounting and Ongoing Administrative Requirements

Separate Bank Accounts and Clean Records

Just as any other business, an S-corporation should have a dedicated business bank account, clear separation between personal and business expenses, and regular reconciliation of accounts. This is both a tax and liability best practice.

Annual Tax Filings

Each year, the S-corporation must file:

• Form 1120-S (federal S-corp return)

• State S-corporation returns, if required

• Schedule K-1s issued to each shareholder

Deadlines typically fall in March, with extensions available if properly filed.

Corporate Formalities Still Matter

Even though an S-corporation is a tax classification, corporate formalities should be taken seriously. This includes annual meetings or written consents, proper documentation of major decisions, clear operating or shareholder agreements, and compliance with state reporting requirements.

These practices help preserve liability protection and support tax positions.

Common Post-Election Mistakes to Avoid

Some of the most frequent issues include:

• Not running payroll for owner-employees

• Paying distributions before salary

• Missing payroll tax deposits

• Ignoring state or local registration requirements

• Treating the S-corp like a sole proprietorship

These mistakes often surface during audits or when a CPA reviews the books later.

The Bottom Line

An S-corporation election can create real tax advantages—but only if it is properly administered after approval. The most successful S-corporations coordinate closely with a CPA and payroll provider. Owners should be careful to follow reasonable salary rules, maintain clean records, and treat compliance as an ongoing process, not a one-time task.

If you have recently made an S-corporation election or are considering one, understanding the post-election rules is just as important as deciding to make the election in the first place.

If you would like help setting up or reviewing your S-corporation compliance after an election, feel free to reach out for a consultation.