We have seen so many business owners complete an S corp election before truly understanding the costs and compliance requirements of an S corp. The purpose of this post is to demystify some of these lesser known costs. The cost to establish and maintain an S corp varies depending on several factors, including state of business, number of partners, and level of professional services. Here is a breakdown of the typical S corp costs:

Initial Form 2553 S Corp Election Filing Fees (one-time) – $0 – $1,000 – This is the initial filing fee for an S corp election. The price normally ranges from $0, if you do it yourself, to $1,000 for a tax attorney or professional service firm to complete it for you.

Payroll Processing Fees (recurring) – $750 – $2,000 per year – If you’ve been operating as a sole proprietorship, single-member LLC, or partnership, your business has likely been paying the owners via owner’s draw. This method is very simple and cost-effective. You distribute money via bank transfer, Zelle, or check. When you elect your business to be taxed as an S corp, your business now needs to process payroll for the owners and pay each shareholder a reasonable salary. Fees to process payroll from a payroll provider or software company range from $750 to $2,000 per year. If your business needs a referral for payroll, complete the following form – Click Here.

Tax Return Preparation (recurring) – $600 – $3,000 per year – Businesses that are sole proprietorships or single-member LLCs do not have a separate tax return requirement. Rather, business income is reported on Schedule C of the owner’s Form 1040 tax return. As an S corporation, your business has an additional tax return requirement (Form 1120-S). The price for an additional tax return ranges from $600 to $3,000 per year depending on the level of service and professional service firm.

Federal Unemployment Taxes (recurring) – $42 per employee per year – Since your business needs to formally process payroll for its shareholders, this leads to additional payroll taxes. For most states, the cost to process payroll is .6% of the first $7,000 of wages or $42 per shareholder/employee per year.

State Unemployment Taxes (recurring) – $500 – $1,000 per employee per year – Similar to federal unemployment taxes above, most states assess a state unemployment tax. This additional S corp cost ranges from $500 to $1,000 per employee per year. This varies based on the state the shareholder/employee lives and works.

State Franchise or Replacement Taxes (recurring) – $0 – $4,500 per year – Certain states assess an additional franchise or replacement tax for S corps (compared to sole proprietorships and single-member LLCs). For example, Illinois has a 1.5% replacement tax for S corps. If your business profits $300,000, you could rack up an additional tax of $4,500 per year.