Key Takeaways

  • Starting an S corp typically involves state filing fees, IRS Form 2553 submission, and possibly legal or CPA service fees.
  • Ongoing costs include franchise taxes, payroll setup, bookkeeping, and compliance-related expenses.
  • S corps are often more cost-effective for businesses earning at least $60,000 annually due to tax savings.
  • Operating costs vary by state, with California imposing a minimum franchise tax of $800 annually.
  • Choosing an S corp over an LLC involves weighing cost, complexity, and tax implications.

S corp fees refer to fees that are incurred when a corporation becomes an S corporation. S corp is a tax status that some corporations use to avoid paying corporate taxes on their incomes. It passes items of income, loss, credits, and deductions through to the shareholders, who will then report them on their individual tax returns. 

While an S corporation offers some financial benefits, it also comes with additional risks and costs.

Using S Corp to Reduce Self-Employment Taxes

As a self-employed person, you'll most likely be paying more taxes on Social Security and Medicare, which are also called self-employment taxes. One thing you can do to lower these taxes is to elect S corporation status.

Classifying Income as a Distribution

If you choose to turn your business into an S corp, you'll be able to classify a portion of your earnings as salary and a portion as a distribution. You'll still be required to pay self-employment taxes on your salary, but you'll only have to pay regular income taxes on the distribution portion. By classifying a larger portion of your income as a distribution, you'll be able to save substantially on self-employment taxes.

As a shareholder in an S corporation, net profit or loss will be passed through to your personal tax returns, where it will avoid payroll taxes and be subject to income taxes only. If your S corp is profitable, such savings may be enough to pay for organizational expenses, maintenance, and tax returns, as well as provide extra tax savings.

Risks of Electing S Corp Status

One of the disadvantages of an S corporation is that it may get extra scrutiny from the IRS, because of the great potential for abuse. For instance, if you earn half a million dollars a year but only assign $20,000 of your earnings as salary, you may trigger an inquiry from the IRS, because you are avoiding self-employment tax.

As such, it is important that you designate a reasonable portion of your earnings as a salary. While it is difficult to determine the right amount to designate, you have to know that pushing the envelope too far can result in an IRS audit or penalties.

Additional Costs for an S Corporation

Although attaining S corp status can help reduce your self-employment taxes, it may also be costlier overall. Similar to a large corporation, an S corporation has both initial and ongoing accounting and legal costs. In addition, some states require S corporations to pay extra fees and taxes. For instance, an S corp in California has to pay a 1.5-percent tax on its earnings, with a minimum amount of $800 a year. A sole proprietor does not have to pay this tax.

Breakdown of Initial and Ongoing S Corp Costs

When evaluating how much does it cost to start an S corp, it’s essential to distinguish between startup and ongoing operational expenses. Here’s a breakdown:

Initial Costs:

  • State Filing Fees: Range from $40 to $500+ depending on the state. For example, filing Articles of Incorporation in California costs $100.
  • Name Reservation Fee (optional): Some states charge $10–$50 if you want to reserve your business name in advance.
  • Registered Agent Fees: If you hire a registered agent service, expect to pay $100–$300 annually.
  • IRS Form 2553 Filing: Free, but you may incur costs if you hire a tax professional to complete it.

Ongoing Costs:

  • Franchise Taxes: States like California charge a flat $800 annual minimum tax, while others have income-based calculations.
  • Payroll Setup and Maintenance: You must run payroll to pay yourself a “reasonable salary.” This typically requires payroll software or service subscriptions ($30–$150/month).
  • Bookkeeping and Tax Prep: Expect $1,000 to $3,000 annually for accounting and filing requirements, especially Form 1120-S.
  • State Annual Reports: Many states require an annual report filing, with fees ranging from $25 to over $100.

These costs may make the S corp structure more suitable for businesses earning at least $60,000–$80,000 annually, where tax savings can outweigh administrative expenses.

Choosing Between an S Corp and a Limited Liability Company (LLC)

One of the main advantages of becoming an S corporation or LLC is that both of them will keep your personal assets safe from creditors. Also, they make it possible for you to avoid paying corporate and personal taxes. However, an S corp differs from an LLC in that its owners pay themselves salaries and get dividends from their profits. An LLC, on the other hand, is a “pass-through” entity, meaning that all its earnings and expenses will be reported on its operator's personal income tax returns.

Both S corp and LLC are entitled to tax deductions for pre-tax expenses such as:

  • healthcare premiums
  • travel expenses
  • car expenses
  • phone bills
  • computers
  • advertising
  • uniforms
  • gifts

How To Apply for S Corp Status

The procedure for filing for S corporation status may vary from one state to another. If your business is located in California, you need to follow these steps.

  1. Register with California's State of Secretary.
  2. Select a name for your S corporation, with the inclusion of a suffix such as “Inc.”
  3. Appoint a minimum of three directors if your corporation has three or more shareholders.
  4. Appoint a registered agent to represent you in official communications.
  5. Draft the Articles of Incorporation.
  6. Submit the Articles of Incorporation to the Secretary of State and pay a filing fee of $100.
  7. Submit Form 2553 to the IRS to file for S corp tax status.

State-by-State Cost Variations for S Corps

State regulations significantly influence how much it costs to start an S corp. Consider these examples:

  • California: $100 filing fee + $800 minimum annual franchise tax.
  • Texas: $300 filing fee, no franchise tax for entities earning under a revenue threshold.
  • Florida: $70 filing fee + $150 annual report fee.
  • New York: $125 incorporation fee, plus potential publication costs ranging from $600–$1,200 in some counties.

It’s important to consult your Secretary of State’s website or a business attorney to understand your state’s specific requirements. Each state’s S corp costs and filing procedures can vary widely and impact your budget.

Frequently Asked Questions

1. How much does it cost to start an S corp? Startup costs include filing fees ($40–$500), optional name reservation, registered agent services, and potentially legal or CPA fees. The IRS filing is free.

2. What ongoing fees should I expect with an S corp? Ongoing costs may include franchise taxes, payroll setup, bookkeeping services, and state annual report filings—totaling several hundred to a few thousand dollars annually.

3. Is it cheaper to start an LLC or an S corp? LLCs are often cheaper to start and maintain. However, an S corp may offer long-term tax savings if your business has substantial profit.

4. Do all states charge a franchise tax for S corps? No, franchise tax rules vary by state. Some charge a minimum fee (e.g., California), while others may not charge franchise tax at all (e.g., Wyoming).

5. When do S corp tax savings outweigh the costs? Generally, when a business earns $60,000 or more annually, the tax savings from S corp self-employment tax reductions can exceed the cost of formation and maintenance.

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