Hey everyone, welcome back to my blog! If you’re thinking about electing S Corp status for your business, this video is a must-watch. Making the wrong moves can cost you big time—from unexpected taxes to legal trouble, or even losing your S Corp status altogether.

Today, I’m breaking down 5 common mistakes business owners make when electing an S Corp—so you can avoid them and keep your money where it belongs! Let’s jump in.

What is an S Corporation? (in Simple Terms)

First things first, an S-corporation is NOT a type of corporation. It’s a tax status you choose for your business. If you already have an LLC or a C-Corporation, you can elect to be taxed as an S Corp if you meet the IRS rules.

Why do business owners elect an S-Corp?

This is when it makes sense to elect an S-Corp

  • To save money on self-employment taxes
  • To protect their personal assets (just like an LLC)
  • To avoid double taxation that C Corps deal with

How does an S-Corp work?

Think about it like this:

  • When you’re self-employed, you file a Schedule C on your personal tax return.
  • With an S-Corp, your business files form 1120S, its own tax return, and gives you a K-1 form—think of this like a W-2 but for business owners.
  • You report that K-1 income on your personal tax return and pay taxes only once—no double taxation!

Sounds great, right? Well, only if you do it correctly. Let’s talk about the mistakes to avoid.

 

1. Missing the S-Corporation Election Deadline

The IRS is strict about deadlines, and if you miss it, you might be stuck paying higher taxes than necessary.

Rule: You have 2.5 months from the start of your tax year to file Form 2553.

For Example:

  • If your business starts on January 1st, you have until March 15th to file.
  • If you miss it? You might have to wait until next year to take advantage of S-Corp tax benefits.

Yes, you can file a late election, but it’s a headache and can cost extra money in penalties. So, mark your calendar and get it done on time!

 

2. Not Paying Yourself a Reasonable Salary

One of the biggest perks of an S-Corp is saving on self-employment taxes—but the IRS won’t let you cheat the system.

If you own an S Corp, you are an employee of your business, and the IRS expects you to pay yourself a reasonable salary before taking any distributions.

For Example:

  • Let’s say your business makes $100,000 in profit.
  • If you pay yourself $0 in salary and take the full $100K as distributions? The IRS can reclassify your earnings, charge back taxes, and add penalties.

Rule of Thumb: Your salary should be at least 30% of your net profit.

  • If you make $100,000, pay yourself at least $30,000 in salary.
  • If you make $50,000, aim for $15,000.

Pro Tip: If your business isn’t making enough to afford payroll yet, that’s okay. But once you’re profitable, set up payroll ASAP to stay compliant.

 

3. Mixing Personal and Business Expenses

A huge mistake business owners make is treating their S Corp bank account like a personal piggy bank.

Remember, your S-Corp is a separate legal entity—think of it as its own person with legal ramifications when you use its money.

DO THIS:

  • Open a separate business bank account
  • Pay for personal expenses from your personal account
  • Use business funds only for business expenses

DON’T DO THIS:

  • Buy groceries, clothes, or personal items with your business account
  • Transfer money back and forth randomly between personal & business accounts
  • Use your business card for non-business expenses

For Example:

Let’s say you accidentally use your business debit card to buy dinner for your family. One time? No big deal—just reimburse your business. But if you do this regularly, you could:

  • Lose legal liability protection (making you personally responsible for business debts)
  • Raise red flags with the IRS (triggering an audit)

Golden Rule: Keep it separate, stay protected!

 

4. Having Ineligible Shareholders

S Corps have strict rules about who can be a shareholder.

You CANNOT have:

  • More than 100 shareholders
  • Non-U.S. residents as shareholders
  • Corporations or partnerships as shareholders

Example:

Let’s say you decide to bring in an investor, but they’re a foreign resident. That automatically disqualifies your S Corp, and the IRS revokes your status—meaning you get pushed back into C Corp taxation (which means double taxation!).

Pro Tip: Before adding new shareholders, make sure they meet IRS rules!

 

5. Ignoring Payroll Taxes & Compliance

If you own an S Corp, you’re an employee, which means:

  • You must run payroll
  • You must withhold & pay payroll taxes

A lot of S Corp owners skip this step and only take distributions, thinking they can avoid taxes. 🚨 Bad idea!

For Example:

• If you take $80,000 in distributions but don’t process payroll at all, the IRS can audit you, reclassify those funds as salary, and hit you with penalties.

Solution:

  • Use payroll software like Gusto or QuickBooks Payroll
  • Work with an accountant to determine a reasonable salary
  • Stay on top of payroll tax filings

Pro Tip: I see this all the time—people ignore payroll, then get hit with a huge tax bill later. Don’t make that mistake!

Final Thoughts

Electing S-Corp status can be a game-changer for your business, but only if you do it right!

Mistakes to avoid:

  • File your election on time
  • Pay yourself a reasonable salary
  • Keep business and personal finances separate
  • Follow IRS rules for shareholders
  • Stay on top of payroll taxes & compliance

By doing this, you’ll stay compliant, maximize tax savings, and avoid costly mistakes!