Cost to File Form 2553? Fee Schedule [Table]

So, you’ve taken the plunge. You set up your new business as an LLC or possibly even as a corporation. Someone recommends that you should be an S-Corp. and you realize you have to file form 2553. But what is the cost to file form 2553?

In this guide, we will answer that question. We will also give you some tips and explain some of the compliance details. Let’s get started!

Background

Form 2553 is a federal form and pertains to the tax status of an S corporation. To determine if your S corporation qualifies for this status, you should read the IRS instructions carefully. If the number of shareholders in the entity exceeds 100, then it will lose its S corporation status.

Form 2553 is not really that challenging of a form to file. It is only four pages but it’s really just the first couple pages that are critical for most people. The main section simply requires some general information about your business, including the effective date of the election and identifying information for each shareholder.

When filing the form, make sure you enter the full names of the shareholders. If the shareholders own more than one hundred shares, include their Social Security Numbers, EINs, and Employer Identification Numbers.

There are a few things to consider when filing for IRS Form 2553. The first step is to make sure that you can meet the deadline. The IRS offers detailed instructions on Form 2553. The IRS also provides deadlines and other important information.

Tax advantages of S-Corporation

There are several tax advantages to incorporating your business as an S-Corporation. These benefits may include the opportunity to lower payroll taxes and the ability to have only one class of shareholders. 

S-Corps are what is called a “flow through entity.” The company itself is not taxed, but the profits just flow through to the individual shareholders.

An S-Corporation also allows its owners to receive both salary and distributions. The salary is subject to employment taxes, but the distributions are not. As such, there can be large savings compared to a sole proprietor. 

How much does the IRS cost to file the form?

When it comes to IRS fees, fortunately they do not charge a fee in the vast majority of situations. In fact, we’ve only seen it a couple times and it is very rare.

The cost to file Form 2553 can vary. The IRS does not charge any fee for filing the form and it usually takes 6 to 8 weeks to get an IRS acceptance letter. Have however, we have seen it take a lot longer to receive the acceptance letter lately. The IRS is understaffed and unfortunately has failed to timely communicate acceptance back to many filers.

There are two specific instances in which the IRS charges a fee. Let’s take a look at each of them.

Private letter ruling

If you miss the filing deadline, you may file a late election. You must demonstrate that failure was due to reasonable cause. Relief must be requested within three years and 75 days of the deemed effective date you entered on line E of Form 2553. 

To request the late relief, the company must meet specific requirements for reasonable cause and must document to the IRS the actions that were taken to correct the mistake once it was discovered. 

If you do not meet the IRS requirements for late relief because the requirements aren’t met, the company must typically request a private letter ruling and pay the required user fee based on Rev. Proc. 2021-1 (or its successor). 

Selection of Fiscal Tax Year

On page 3, there is Part II. In this part, the IRS is asking for the “Selection of Fiscal Tax Year.” 

If you are looking to establish a fiscal year based on a business purpose, you must check box Q1. You must attach to Form 2553 a statement that details the facts and background of your request.

If applicable, you would also disclose the gross sales necessary to establish the required business purpose. 

If you check box Q1 in this part, the IRS will assess a $6,200 user fee. This user fee is subject to change by Rev. Proc. 2021-1 (or a successor ruling). 

You should not pay the fee when you file Form 2553. The IRS will forward Form 2553 to the IRS center in Washington, DC. They will, in fact, notify you that the fee is due.

Why Should a Business Owner File Form 2553?

The tax advantages of an S-Corporation are numerous. As an owner of the business, you are entitled to receive both salary and dividend payments, but you will not be subject to self-employment taxes.

Moreover, you can deduct the cost of the wages you pay to the corporation when computing the income passed through to the shareholders. However, the IRS will only allow a reasonable division of salaries and dividends between owners and will recharacterize your income if they believe the division is unreasonable.

Entrepreneurs often use s-Corporations to set up a business. However, some people are wary of such entities.

For instance, an S-Corporation may be too complex for a small business, while a C-Corporation may be better for a one-person operation. Those worried about these structures’ complexity should look into hiring an accountant for assistance.

Another important reason for starting an S-Corporation is the ability to avoid double taxation. Unlike LLCs, S corporations do not have state residency requirements and are taxed much lower.

S corporations have unlimited life, no state residency requirements, and they can pay for the medical expenses of the shareholders. Additionally, they have complete management and can pay for over-the-counter medications and medical expenses.

How much does a CPA or tax professional charge to file form 2553?

When it comes to CPAs and tax professionals, the fee structure can very wily. We have seen some clients who have a long-standing relationship with their CPA. This the CPA often won’t charge a fee or will charge something nominal like $150 to file the 2553.

But in many situations, the CPA will charge more because the 2553 form has been completed in conjunction with a consultation on S corpse. The CPA should not just file a 2553 without consulting clients on how escorts work and pointing out all the pros and cons.

So, in addition to a small filing fee, you might see a consulting charge to cover time spent and discussions with the client. But in most situations the overall CPA charge should be $500 or less.

Final thoughts

To summarize, the IRS will not charge a fee for a timely filed form 2553 based on a calendar year. This will cover the vast majority of filings.

The cost to file form 2553 from a CPA standpoint can certainly vary. Make sure you do your due diligence.