There are many advantages to starting an S Corp in New York with the main one being tax benefits. However, with that comes forms and requirements that you must meet to set your business up as an S Corp and to stay compliant.

S Corp vs. Other Business Structures

There are several considerations when choosing a business structure but most owners select the entity that will allow them to pay the least amount of federal or state income tax. A sole proprietorship is a business that is not incorporated. The individual runs the business and reports its income or loss on their personal income tax return and pays self-employment tax on his or her earnings. The owner also assumes the liability from the actions of the business.

A partnership is formed when two or more people carry on a business for profit. The partnership files a separate tax return and the partners report the income or loss from the partnership on their individual tax returns.

Business owners may also incorporate to form a separate entity from themselves. By default, when a business incorporates, they are treated as a “C” Corp. Although there is a benefit of liability protection owners of a “C” Corp are taxed twice, once on the business profits and also on the money distributed.

S Corp owners can have the best of both worlds. They can avoid the double taxation of the C Corp while still maintaining the other benefits that a corporation provides. S Corp owners pay federal income taxes on the earnings of the business but perhaps the main benefit of the S Corp is that it allows the business owners the opportunity to save on Social Security and Medicare tax.

An S-Corp owner will need to be paid a salary and some may see that as an added burden but the payroll tax savings can still be substantial. Separate tax returns for either the S Corp or C Corp must be filed each year in addition to the owner’s personal income tax return.

Pros and Cons to S Corp Status

An S Corp, like any business structure, has its advantages and disadvantages. The S Corp gives the owners opportunity to save on self-employment taxes, which at 15.3% can be significant. In addition to the tax benefits, it also comes with other requirements that need to be considered including:

  • Must be a U.S. corporation
  •  Must have no more than 100 shareholders
  • All shareholders must approve the S-election
  • Shareholders must be U.S. citizens or U.S. persons (certain trusts, estates or non-profits may also be shareholders)
  • Profits and losses must be allocated based in proportion to shareholder’s interest
  • Only one class of stock is allowed
  • Must be a small business corporation, per IRC section 1361

An S Corp must keep accurate corporate records of its financial transactions. The business should have its own business bank account and personal transactions should be done through separate bank accounts. Minutes should be recorded of important updates. In short, it should operate like a corporation.

How Do You Set Up an S Corp?

Many business owners make the mistake of setting up an LLC but not the S Corp. Even though an LLC is a legal business entity under the laws of the state, the Internal Revenue Service does not recognize LLCs. In order for the IRS to treat your LLC as an S Corp for tax purposes a form must be filed to request the tax status.

The form must be submitted no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year is to take effect. If you are reading this and it is past this time frame there is safe harbor to still obtain the S Corp status by making a special request to the IRS. You can call the IRS but it won’t do you much good. The request needs to be made through Form 2553.

After the request is made and granted the you should receive an acceptance letter confirming the S Corp

tax designation. You should keep this document in your permanent file. If you lose it, you can still get your S Corp acceptance letter from the IRS.

What is the Penalty for Filing a Late S Corp Tax Return?

It is important for anyone to file their tax returns on time but it is especially if you have an S-Corp. The penalties for late filing are usually higher. For example, a Form 1120-S filed late will result in a penalty of $220 per month, or part of a month (up to 12 months) multiplied the number of shareholders for the year. Bottom line is the tax return should be filed by the deadline, which for S-Corps with a calendar year end, is March 15.

How Do You Start an S Corp in New York?

If your business receives federal S Corp status from the IRS there is still more work to be done. Just because the IRS has given you S Corp status you will still need to make a similar election if you want to have S Corp status with NY State. Prior to making the NY State S Corp election request the business will need to have its federal s corporation status confirmed.

New York has a similar requirement to the IRS in that the S Corp election must be signed by all shareholders.

Filing Requirements for New York S Corporations

If the New York State Tax Department accepts your S Corp election request you will need to file a separate New York State tax return for the business in addition to your personal NY State income tax return.

The New York S Corp will also need to pay a franchise tax which is a fixed dollar minimum tax based on the sales of the business. If the franchise tax is expected to be greater than $1,000 then estimated taxes should be made.

New York S Corp and Nonresident Shareholders

A New York S Corporation should also prepare to make estimated payments to the State if it has corporation shareholders who are nonresidents. However, this requirement is waived if the particular tax is less than $300 for the year or if the New York S Corp elected to be subject to the Pass-Through Entity Tax.

The S Corp that does not make required estimated tax payments for its nonresident shareholders may suffer a $50 penalty for each failure.

Why does NY State require that the S Corp make these estimated payments on behalf of these nonresident shareholders? The answer is simply they want to increase their chance that the nonresident shareholders pay taxes owed to them. The S-Corp will not be required to make these estimated tax payments on behalf of their nonresident owners if the nonresident owner completes an exemption form that essentially certifies that they will make any estimated payments and submit tax returns that they are required to.

New York S Corp Penalties

If your New York S Corporation tax return is not filed by the due date, including extensions, a penalty of 5% per month, up to a total of 25% will be added.

If the New York S Corporation tax return is filed more than 60 days late the penalty is $100 or 100% of the amount required to be shown as tax, whichever is smaller.

New York City S Corps: What to Know

If you operate an S Corp within the five boroughs you have additional filing requirements. The New York City Department of Finance does not recognize S Corporations even if the business has been approved to be taxed as an S Corp by New York State. Instead, New York City imposes a General Corporation Tax (GCT) of up to 8.85% which is on top of the federal and state income shareholders may have to pay.

S Corps in New York City may be subject to the GCT if they are:

  • Doing business
  • Employing capital
  • Owning or leasing property in a corporate or organized capacity
  • Maintaining an office

The filing and payment deadline for the GCT is March 15 for S Corporations operating on a calendar year.


If you are thinking about starting a business as an S Corp and are in NY State or NYC, contact a tax professional first. Although an S Corp can provide tremendous tax benefits you should first weigh the pros and cons to see if it is the right business structure for you.

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