Every fall, Accountico hears the same question from consultants, contractors, agency owners and e-commerce sellers: “Should my business become an S corporation next year?” This S corp election Union City guide explains how the election works, the Form 2553 deadline for the 2027 tax year, what the IRS means by a reasonable salary, and the California costs that are easy to overlook.
It is written for owners in Union City and the Tri-City area, including Fremont and Newark, as well as Hayward, San Leandro, Castro Valley and the wider Bay Area. Late October through December is the right time to decide, because the 2026 books are almost complete and an owner’s payroll is much easier to set up before the first paycheck of 2027 than in the middle of the year.
What an S Corporation Election Actually Does
An S corporation is not a type of business you register with the state. It is a federal tax election. According to the IRS S corporations page, an S corporation passes its income, losses, deductions and credits through to its shareholders, who report them on their personal returns. That avoids the double taxation that applies to a regular C corporation.
The appeal for small businesses is payroll tax. A sole proprietor or single-member LLC owner pays self-employment tax on net earnings. The IRS self-employment tax page puts that rate at 15.3%: 12.4% for Social Security and 2.9% for Medicare. An S corporation owner who works in the business instead receives a W-2 salary that is subject to Social Security and Medicare tax, and the rest of the profit can be paid out as distributions that are not subject to those taxes. The salary still has to be reasonable, which is the part that causes most of the trouble.
California follows the federal choice with its own costs. The FTB 2025 Form 100S booklet says corporations that elect federal S status and have a California filing requirement are deemed to have made a California S election effective on the same date. The FTB LLC page adds that an LLC must have the same classification for California and federal tax purposes. In practice, a Union City LLC that elects S status files California Form 100S instead of Form 568.
Who Can Make an S Corp Election
The IRS Instructions for Form 2553 list the tests a corporation or eligible entity must meet. In plain English, the business must:
- Be a domestic corporation, or a domestic entity such as an LLC that is eligible to elect to be treated as a corporation.
- Have no more than 100 shareholders (a married couple and their estates can count as one).
- Have only allowable shareholders: individuals, estates, certain trusts and certain exempt organizations, with no partnerships, corporations or nonresident alien shareholders.
- Have only one class of stock. Differences in voting rights are allowed, but all shares must have identical rights to distributions and liquidation proceeds.
- Not be an ineligible corporation, such as certain banks, insurance companies or a DISC.
- Use a permitted tax year, which for most small businesses is a year ending December 31.
- Have every shareholder consent to the election.
The one-class-of-stock rule matters for multi-owner LLCs. An operating agreement that gives one member a preferred return or a different share of liquidation proceeds can create problems, so have it reviewed before you file. If you are still choosing an entity, our company formation services and our post on the cheapest way to register an LLC or S corp cover the setup side.
Form 2553 Deadline for the 2027 Tax Year
The IRS instructions allow Form 2553 to be filed either at any time during the tax year before the election is to take effect, or no more than 2 months and 15 days after the beginning of the tax year it is to take effect. For an existing calendar-year business that wants S status starting January 1, 2027, that means:
- Earliest: any time during 2026, including right now.
- Latest: March 15, 2027 (a Monday).
Newly formed businesses follow a different rule. The IRS gives the example of a calendar-year corporation that begins its first tax year on January 7; it must file between January 7 and March 21, and an election filed before January 7 is not valid because the corporation had no prior tax year. If you plan to form a new Union City corporation or LLC in early 2027, the 2-month-and-15-day clock starts when the first tax year begins.
How to file and confirm
- Every shareholder signs a consent in column K or on a separate consent statement. If spouses have a community interest in the stock or its income, both must consent. California is one of the community property states covered by IRS Publication 555, so married owners in Union City should check this step carefully.
- The IRS where to file page for Form 2553 lists the Department of the Treasury, Internal Revenue Service, Ogden, UT 84201, or fax 855-214-7520, for businesses whose principal place of business is in California. If you fax it, keep the original with the corporate records.
- The instructions say the business should generally receive a determination within 60 days. If you do not hear back within 2 months of filing (5 months if box Q1 is checked for a fiscal year), the IRS says to follow up by calling 1-800-829-4933.
Keep the IRS acceptance letter with your permanent records. Lenders, banks and future tax preparers often ask for it.
Missed the Deadline? Late Election Relief
A late election generally takes effect for the following tax year. The IRS late election relief page explains that Rev. Proc. 2013-30 can grant relief when all of these are true:
- The entity intended to be an S corporation, is eligible, and failed to qualify only because the election was late.
- There is reasonable cause for the late filing.
- The entity and all shareholders reported income consistently with S status for the year it should have been effective and every year after.
- Less than 3 years and 75 days have passed since the intended effective date (a narrow exception exists for some corporations).
The IRS instructions say a late election must have “FILED PURSUANT TO REV. PROC. 2013-30” written at the top of Form 2553. If the business does not qualify, its option is generally a private letter ruling with a user fee. Relief also cannot fix an election that was invalid for another reason, such as a missing shareholder signature.
Reasonable Salary: The Rule That Makes or Breaks the Election
On its S corporation compensation page, the IRS says S corporations must pay reasonable compensation to a shareholder-employee for services provided before non-wage distributions may be made. The Form 1120-S instructions say distributions and other payments to a corporate officer must be treated as wages to the extent they are reasonable compensation for services. The IRS can reclassify distributions as wages subject to employment taxes.
The IRS does not publish a safe-harbor percentage. Instead, it looks at where the company’s gross receipts come from: the owner’s personal services, the work of other employees, or capital and equipment. Profit generated by the owner’s own services points toward wages. Factors the IRS lists include:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements
- The use of a formula to determine compensation
The courts take this seriously. On its page on S corporation employees, shareholders and corporate officers, the IRS describes a 2012 case in which a shareholder paid himself $24,000 a year in wages plus large distributions. The court held that the test is whether payments were truly pay for services, and that the intent to limit wages does not control (David E. Watson, PC v. U.S.).
A practical approach for a Bay Area consultant, designer or contractor is to document what it would cost to hire someone to do your job locally, adjust for your hours and role, and keep that support in your files. Revisit it every year as profits change.
Health insurance for owners
The IRS says health insurance premiums paid for a more-than-2% shareholder-employee are deductible by the S corporation and reported as wages in box 1 of the owner’s Form W-2. If they are paid under a plan for all or a class of employees, they are not subject to Social Security, Medicare or FUTA tax, so they are not included in boxes 3 and 5. The owner may then qualify for the self-employed health insurance deduction. Set this up through payroll before year-end so the premiums land on the W-2.
Setting Up Owner Payroll in California
Electing S status means your business becomes an employer, even if you are the only person on payroll. The IRS says corporate officers who perform services and receive pay are employees for federal employment tax purposes, and the EDD California Employer’s Guide (DE 44) lists corporate officers among workers whose services are specifically covered by law.
- Register with the EDD. The DE 44 says you become a subject employer when you pay wages over $100 in a calendar quarter, and you must register within 15 days.
- Know the 2026 California rates. The 2026 UI taxable wage limit is $7,000 per employee and the new employer UI rate is 3.4%. The ETT rate is 0.1% on the first $7,000. SDI is withheld from the employee at 1.3%, with no taxable wage limit.
- Federal payroll taxes. IRS Publication 15 sets 2026 Social Security tax at 6.2% each for employer and employee on wages up to $184,500, and Medicare at 1.45% each with no wage limit.
- Withholding forms. Collect a federal Form W-4 and a California DE 4 for yourself.
- Regular pay. Run payroll on a set schedule rather than one large check in December, and make federal deposits and quarterly returns on time.
Our payroll services team sets up owner payroll for new S corporations, and our Hayward year-end payroll checklist walks through W-2 and 1099 deadlines.
California Costs to Weigh Before You Elect
The FTB S corporations page says California taxes every S corporation with California source income at 1.5%, and every corporation incorporated, registered or doing business in California must pay the $800 minimum franchise tax. The Form 100S is due on the 15th day of the 3rd month after year-end. Things to keep in mind:
- The 1.5% tax is on top of personal tax. The S corporation pays the greater of the $800 minimum or 1.5% of its California net income, and shareholders still pay California personal income tax on their share.
- LLCs swap one tax for another. An LLC already pays the $800 annual tax, plus an LLC fee if total California income is more than $250,000. Once it elects to be taxed as an S corporation, the FTB says it files Form 100S and is subject to the Corporation Tax Law. Our California $800 franchise tax guide explains both.
- Former C corporations have extra rules. The FTB says certain built-in gains recognized in the first ten years after a C corporation converts are taxed at the 8.84% C corporation rate instead of 1.5%.
- Two more returns. You will file federal Form 1120-S and California Form 100S each year, plus quarterly payroll returns.
- Possible PTE tax planning. S corporations can be eligible for California’s elective pass-through entity tax. See our California PTE elective tax guide.
A Rough Example for a Union City Owner
Here is a simplified illustration using 2026 rates. It is Accountico’s own arithmetic, not an IRS example, and it ignores income tax effects such as the deduction for half of self-employment tax.
Assume a single-member LLC in Union City earns $120,000 of net profit and the owner has no other wages.
- As a sole proprietor/disregarded LLC: Schedule SE applies self-employment tax to 92.35% of net earnings. $120,000 x 92.35% = $110,820, and $110,820 x 15.3% = about $16,955 of self-employment tax.
- As an S corporation paying a $70,000 salary: Social Security and Medicare on the salary, employer and employee shares combined, are $70,000 x 15.3% = $10,710.
- Gross difference: about $6,245.
- Subtract California payroll costs: new employer UI of about $238 (3.4% of $7,000), ETT of $7, and SDI withheld of $910 (1.3% of $70,000).
- Then subtract: federal unemployment tax, payroll processing, and preparation of Form 1120-S and Form 100S. The $800 minimum tax applies either way, because the LLC already pays the $800 annual tax.
The result is a meaningful saving in this example, but it depends entirely on the $70,000 salary being reasonable for the work. If the owner’s role would cost $110,000 to replace in the Bay Area, most of the saving disappears. The same math at $50,000 of profit often leaves little or nothing after costs. That is why we run the numbers with real books before recommending an election.
When an S Corp Election Usually Makes Sense (and When It Does Not)
It is often worth a closer look when:
- Profit is steady and comfortably above what a reasonable salary for your role would be.
- Your books are clean and up to date every month.
- You are willing to run payroll and keep business and personal spending separate.
It is often not a fit when:
- Profit is low, uneven or mostly reinvested.
- The business has, or plans to have, a nonresident alien owner, a corporate or partnership owner, or uneven ownership economics.
- You plan to raise venture capital with preferred stock, which would create a second class of stock.
- You expect to sell or close the business soon.
S Corp Election Union City Checklist Before March 15, 2027
- Close out 2026 books so you know your true profit. Our bookkeeping services can catch you up.
- Model the numbers with a documented reasonable salary and all California costs.
- Review ownership and the operating agreement for the one-class-of-stock and eligible-shareholder rules.
- Confirm your EIN, legal name and address match IRS records.
- Collect every shareholder signature, including spouses where community property applies.
- File Form 2553 by mail or fax and calendar a 60-day follow-up.
- Register with the EDD and set up payroll before the first owner paycheck.
- Update estimated taxes. Withholding on your salary may replace some quarterly payments; see our Q4 estimated tax guide for Union City.
S Corp Election Union City FAQs
What is the deadline to file Form 2553 for 2027?
For a calendar-year business that wants S corporation status starting January 1, 2027, the IRS Form 2553 instructions allow the election to be filed at any time during 2026 or no more than 2 months and 15 days after the 2027 tax year begins, which is March 15, 2027. A brand-new corporation cannot file before its first tax year begins; its window starts on the day its first tax year begins.
Can an LLC in Union City elect S corporation status?
Yes. An LLC that is eligible to elect to be treated as a corporation can file Form 2553, and the IRS instructions say an entity that meets the tests is treated as a corporation as of the effective date of the S election without filing Form 8832. The Franchise Tax Board says an LLC must have the same classification for California and federal purposes, so the LLC then files California Form 100S instead of Form 568.
Do I need a separate California S corporation election?
No separate form is required. The FTB Form 100S booklet says corporations that elect federal S corporation status and have a California filing requirement are deemed to have made a California S election effective on the same date. California then taxes the S corporation at 1.5% of net income, with an $800 minimum franchise tax.
How much salary does an S corporation owner have to take?
The IRS does not publish a fixed dollar amount or percentage. It says an S corporation must pay reasonable compensation to a shareholder-employee for services before making non-wage distributions. Factors the IRS lists include training and experience, duties, time devoted to the business, what comparable businesses pay for similar services and payments to non-shareholder employees. Document how you set the number.
What happens if I miss the March 15, 2027 deadline?
A late election generally takes effect the following tax year. However, Rev. Proc. 2013-30 offers late election relief if the business intended to be an S corporation, has reasonable cause, reported income consistently with S status and requests relief within 3 years and 75 days of the intended effective date. Otherwise, the business generally must request a private letter ruling and pay a user fee.
Does an S corporation always save taxes?
No. An S corporation can reduce self-employment tax because distributions are not subject to Social Security and Medicare tax, but the owner must take a reasonable W-2 salary, and the business takes on payroll, California payroll taxes, SDI withholding, a 1.5% state entity tax with an $800 minimum, and two extra returns (Form 1120-S and Form 100S). For lower or irregular profits the savings may not cover the added cost.
Get Help With Your S Corp Election Union City Decision
An S corporation can be a smart move for a profitable owner-operated business, but only with the right salary, clean books and payroll that runs on time. Accountico helps consultants, contractors, professional firms and family businesses in Union City, Fremont, Hayward, Newark, San Leandro, Castro Valley and across the Bay Area model the election, file Form 2553, set up owner payroll and handle the Form 1120-S and Form 100S each year. Learn more about our tax strategy and planning and tax preparation services.
Book a free 30-minute consultation or contact our team to review whether an S corporation fits your business for 2027.
Accountico Inc
33476 Alvarado Niles Rd, Ste A007, Union City, CA 94587
(510) 400-9341
Disclaimer: This article is general information for business owners and is not tax, legal, payroll or accounting advice. Tax rules, rates and IRS and FTB guidance change, and individual situations differ. Confirm requirements with the IRS, the California Franchise Tax Board, the EDD, or a qualified tax professional before acting.
