Key Takeaways

  • The S corp late filing penalty is typically $195 per shareholder, per month, up to 12 months.
  • Penalties apply even if no taxes are owed, and they can add up quickly with multiple shareholders.
  • Reasonable cause, not ignorance or oversight, is required to get a penalty abated.
  • Common ways to seek relief include requesting first-time penalty abatement or demonstrating reasonable cause.
  • Filing an extension does not extend the deadline to deliver Schedule K-1s to shareholders.
  • The IRS often issues penalty notices (e.g., Letter 1125) to inform businesses of late filings.
  • Timely filing of Form 1120S and K-1s is critical to avoiding penalties and IRS scrutiny.
  • Assistance from a tax attorney or accountant can be essential when navigating penalty abatement.

The S corp late filing penalty applies to tax returns of various types that are not filed promptly.

Who Chooses the S Corp? 

An S corp is a business structure that only privately held companies may choose. It is a popular choice. According to data from the U.S. Small Business Administration, about 44 percent of companies with fewer than 500 employees, generally considered to be small organizations, function as an S corp. Only 22 percent of the companies this size run as a C corp, by comparison.

Why Choose the S Corp?

Federal tax benefits spur many companies to choose the S corp structure. An S corp can:

  • Keep the limited liability provisions that a corporation enjoys
  • Pass corporate incomes, losses, etc. to shareholders for tax purposes

Even with tax benefits, changing corporate structure is something to consider carefully and thoroughly because not every business is eligible. Also, only domestic corporations can elect to change from another structure into an S corp. Before deciding to move to an S corp structure, a company should consult with tax and legal counsel to avoid costly mistakes.

To function as an S corp, the company must meet certain conditions.

  • It must have no more than 100 allowable shareholders who:
    • Are individuals or some types of trusts or estates
    • Are not partnerships, corporations, or non-resident aliens
  • The company may only offer one class of stock.
  • Certain types of companies, like financial institutions and insurance companies, are not eligible to operate as an S corp.
  • Shareholders must sign Form 2553, Election by a Small Business Corporation, to indicate their agreement with the decision to operate as an S corp.

Special Considerations for S Corps

The IRS watches S corps carefully for potential violations of employment tax law. The company must be very careful not to underpay shareholders who also work for the company. If it looks like a shareholder's compensation is out of line with the market, the IRS can classify part of the earnings as unpaid wages and force the company to pay Medicare and Social Security taxes on them. Salaries overall must be monitored closely. Low salaries combined with high distributions could draw attention from IRS auditors. 

Tax Requirements for an S Corp

The S corp has some specific tax filing deadlines.

  • Each quarter, the S corp must file IRS Form 941 to report total withholding. Those funds must be submitted to the IRS four times per year at the end of January, April, July, and October. Late returns are penalized at 5 percent of the unpaid tax for every month or a partial month late.
  • The annual tax return is due by the 15th day of the third month after the end of the tax year (usually March 15). For a six-month extension, the corporation can file IRS Form 7004. If the return is late, penalties accrue from the first day at 5 percent of the unpaid tax for every month or portion of a month late. The maximum penalty is 25 percent of the unpaid tax. Even if there was no tax due on the return, the penalties are still $195 per month for any portion of a month when the return is late times the number of shareholders.
  • All financial activity is reported on Form 1120S with an attached Schedule K-1 for each shareholder.
  • The K-1 must include the shareholder's share of the taxable income, and the shareholder must report it on his or her personal return. That individual return is due on April 15, just like other taxpayers. By passing the corporate income through to the personal return, shareholders can avoid double taxation.
  • The IRS Form 940 is due by January 31 of each year to report the wages that the S corp pays employment taxes on. Those taxes include withholding as well as Medicare and Social Security. Late returns are subject to a 5 percent penalty for each month late. If all the taxes are paid on time, the IRS may extend the deadline for the return to February 10.  The company must file an annual Federal Unemployment Tax Return on Form 940 if:
    • It pays wages of $1,500 or more in any quarter OR
    • It has at least one employee working at least part of a day in 20 or more weeks

How Late Filing Can Affect Shareholders

The late filing of an S corp return not only affects the business but also impacts shareholders directly. Schedule K-1s report each shareholder’s share of income, losses, and credits. If K-1s are delayed:

  • Shareholders may be unable to file their individual returns on time.
  • Delayed filings can result in penalties for the shareholders themselves.
  • Uncertainty around taxable income may affect financial planning and estimated tax payments.

Avoiding Future Late Filing Penalties

S corporations can take proactive steps to avoid late filing penalties:

  • Set calendar reminders well in advance of the March 15 deadline.
  • Work with a qualified tax professional to ensure timely preparation and filing.
  • File Form 7004 for a six-month extension if more time is needed, but remember:
    • Form 7004 only extends the time to file, not the deadline for furnishing Schedule K-1s to shareholders.
  • Keep accurate records throughout the year to avoid delays in tax preparation.

Can You Get the S Corp Late Filing Penalty Removed?

Yes, the IRS does offer options to have the S corp late filing penalty removed under certain conditions. The most common relief avenues include:

1. First-Time Penalty Abatement (FTA)

If this is the first time your S corp has been penalized, you may qualify for FTA. To be eligible:

  • The S corp must have filed all prior required returns.
  • All taxes due must be paid or arranged through a payment plan.
  • There must be no significant penalties in the prior three years.

2. Reasonable Cause Relief

Even if your S corp doesn’t qualify for FTA, penalties may be removed if you can show a reasonable cause. Valid reasons might include:

  • Natural disasters or severe illness
  • Serious business disruptions (e.g., theft, fire)
  • Reliance on a tax professional who failed to file
  • Inability to obtain necessary records

You’ll need to submit a written explanation with supporting documentation to justify the request.

3. IRS Form 843

Use IRS Form 843, Claim for Refund and Request for Abatement, to formally request removal of penalties. Be detailed, specific, and include any relevant documents.

💡 Note: The IRS generally does not accept “I forgot” or “I didn’t know” as reasonable cause.

Common IRS Notices for Late Filing

When an S corp files late, the IRS typically notifies the business with Letter 1125 or similar penalty letters. These letters include:

  • The total late filing penalty assessed
  • The number of shareholders the penalty is based on
  • Instructions for payment or for disputing the penalty

It's important to respond promptly to IRS correspondence. Ignoring a notice can result in escalating enforcement actions.

What Happens When an S Corp Files Late?

Failing to file IRS Form 1120S on time triggers significant penalties—even if the S corporation owes no tax. The penalty is $195 per shareholder per month (or part of a month), up to 12 months. For example, if a return is filed three months late and the S corp has four shareholders, the penalty could be $2,340.

This penalty structure reflects the IRS’s intent to encourage timely filing and transparency with shareholders. It applies to returns that are late or not filed at all, including those submitted electronically after the deadline.

Additionally, the IRS expects each shareholder to receive a timely Schedule K-1. Failing to provide K-1s to shareholders by the filing deadline (usually March 15 or the extended deadline) may also result in penalties, even if the 1120S is filed.

Frequently Asked Questions

1. How much is the S corp late filing penalty? $195 per shareholder per month, up to 12 months, regardless of whether taxes are owed.

2. Can the IRS remove a late filing penalty for an S corp? Yes, if you qualify for first-time penalty abatement or can demonstrate reasonable cause.

3. Does filing Form 7004 extend the due date for Schedule K-1s? No. Schedule K-1s are still due to shareholders by the original due date, even if an extension is filed.

4. What if I didn’t know about the S corp filing requirements? Lack of knowledge is not typically accepted as reasonable cause by the IRS.

5. How can I dispute a penalty notice? Submit IRS Form 843 with a written explanation and supporting documents, or consult a tax attorney for assistance.

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