The cost to start an S corp typically runs $500 to $5,000 up front, with another $3,000 to $8,000 each year to keep it compliant. The spread is wide because an S corp is really two things stacked together: a state-level LLC or corporation you have to form and pay for, and a federal tax election you layer on top. How much you spend depends on your state, whether you hire professionals or do the paperwork yourself, and the payroll system you’ll need once the election is active.
Here is where the money actually goes, from day one through year two and beyond.
What You’re Actually Paying For
The S corp designation itself is a federal tax election, not a type of business entity. You first form an LLC or a corporation at the state level, then file IRS Form 2553 to elect S corp tax treatment. That two-step structure is why the cost conversation has two sides. The entity creation side has state filing fees and formation paperwork. The tax election side is free to file but brings ongoing requirements like running payroll, filing a separate business tax return, and documenting a reasonable salary.
Form 2553 itself has no filing fee. What costs money is doing it on time and doing it right. The election must be filed no later than two months and 15 days after your tax year begins to take effect for the current year. For a calendar-year business, that is March 15. Miss the window and the election is delayed a full year, which means another twelve months of self-employment tax on your net income.
Startup Costs
State Filing Fees
Government filing fees for forming an LLC or corporation range from about $35 to $500 depending on the state. Most states fall between $50 and $200, and the average LLC filing fee lands around $130. Some states tack on an initial franchise tax or minimum tax at formation that can add several hundred dollars before you have earned anything. A few states still require newly formed LLCs to publish a formation notice in local newspapers, and that publication requirement can run several hundred dollars on its own.
Registered Agent
Every formally organized entity needs a registered agent to receive legal documents and government correspondence. You can serve as your own agent in most states, but a commercial service keeps your home address off public records and makes sure nothing gets missed. First-year fees generally run $100 to $150. If you form in a state where you don’t have a physical presence, a commercial agent is effectively required.
Professional Help
You can handle formation yourself for just the state fee and some time, but most owners pay for help. Three common paths:
- Online filing services handle the mechanical paperwork for $50 to $300 on top of state fees. They file your formation documents and often upsell add-ons. Be careful with EIN charges: the IRS issues EINs free.
- A CPA for initial corporate setup and the S corp election typically runs $750 to $2,000, with the price scaling to ownership complexity and how many state registrations you need. The value is tax planning: shareholder allocations, fiscal year choice, and confirming you meet eligibility before Form 2553 goes in.
- A business attorney for a standard small business runs $1,500 to $3,500. You get a customized operating agreement or corporate bylaws covering ownership rights, management authority, and exit provisions. For a single-owner business with modest assets this is often more than you need; for multi-owner ventures or anything with significant intellectual property, skipping legal help is where disputes start.
Payroll Setup
Once the S corp election is active and you’re working in the business, you have to run payroll on yourself. Initial setup with a third-party payroll provider runs $100 to $500 to configure federal and state tax accounts.
Recurring Annual Costs
The startup bill is a one-time hit. The annual compliance costs are what surprise new S corp owners, and they’re the reason the election doesn’t make sense at low income levels.
State Fees and Agent Renewal
Most states require an annual report or franchise tax payment to keep your entity in good standing, whether or not you had any revenue. These fees range from nothing in a few states to several hundred dollars in others, and a handful of states charge $500 or more. Registered agent renewal typically runs $100 to $300 per year. Missing a state filing deadline can trigger administrative dissolution of your entity, which would also kill your S corp election.
S Corp Tax Return
The S corp files its own federal return on Form 1120-S, separate from your personal return. The return requires complete financial statements and generates a Schedule K-1 for each shareholder, which flows to the owner’s personal Form 1040. CPA preparation of the 1120-S typically costs $750 to $2,500, scaling with transaction volume and number of shareholders. That is on top of what you’ll pay for your personal return, which also gets more complex with a K-1 in it.
Payroll Processing
Monthly payroll processing for a single-employee S corp runs $50 to $150, or roughly $600 to $1,800 a year. That covers tax calculations, withholding deposits, quarterly Form 941 filings, and year-end W-2 preparation. Adding employees beyond yourself increases the per-employee charges.
Employer Payroll Taxes on Your Salary
On top of the processing fee, the S corp owes the employer share of FICA on your wages: 6.2% for Social Security on wages up to $184,500 in 2026, plus 1.45% for Medicare on all wages with no cap. The business also owes federal unemployment tax at an effective 0.6% rate on the first $7,000 of each employee’s wages, plus state unemployment insurance at whatever rate your state sets. For a single owner-employee drawing a $60,000 salary, the employer-side payroll tax bill runs roughly $5,300 a year. That is a real cost, offset by the self-employment tax savings on your profit distributions, which is the whole point of electing S corp status.
Reasonable Compensation: The Rule That Drives the Cost
The IRS requires every S corp owner who works in the business to take a salary that meets a “reasonable compensation” standard before taking any additional profit distributions. Salary is subject to Social Security and Medicare taxes; distributions are not. Without the salary requirement, owners would pay themselves entirely in distributions and skip payroll taxes altogether.
What counts as reasonable is more art than science, and it’s one of the most common S corp audit triggers. The IRS looks at the owner’s training and experience, time devoted to the business, duties performed, and what comparable businesses pay for similar roles. Set the salary too low and the IRS can reclassify your distributions as wages, pulling back employment taxes along with penalties and interest. Some owners pay a CPA or compensation specialist $300 to $1,000 to prepare a formal reasonable compensation analysis, which doubles as a documented defense if the IRS questions the number.
Penalties for Getting It Wrong
The compliance costs exist because the penalties don’t bend much.
Filing Form 1120-S late triggers a penalty for each month the return is overdue, up to twelve months, assessed per shareholder. The base amount is $195 per shareholder per month and gets adjusted annually for inflation, bringing the current figure above $250. A two-shareholder S corp that files six months late easily exceeds $3,000 in penalties.
Setting owner compensation too low can be the more expensive mistake. Reclassified distributions pick up the full 15.3% employment tax on amounts up to the Social Security wage base, plus penalties and interest on both the employer and employee sides.
Missing the Form 2553 deadline delays your election by a year. On $100,000 of net profit, that’s roughly $14,100 in self-employment tax you didn’t need to pay. Late election relief is available if you file within three years and 75 days of the intended effective date and can show reasonable cause, with all shareholders having reported income consistently with S corp treatment. Outside that window, the only fix is a private letter ruling, which carries IRS user fees starting at $3,500.
When the Numbers Actually Work
All of this only makes sense if the tax savings beat the compliance bill. Savings come from the portion of business profit you take as distributions rather than salary, which escapes the 15.3% self-employment tax. A sole proprietor pays that tax on every dollar of net profit. An S corp owner pays it only on salary.
A simplified example: a sole proprietor netting $150,000 after $50,000 in business expenses pays about $15,300 in self-employment tax. The same business as an S corp, with a $50,000 reasonable salary, pays about $8,100 in combined employer and employee payroll taxes on that salary. The remaining $50,000 in distributions goes on the owner’s personal return subject to income tax but not payroll tax. Annual savings land around $5,000 to $7,000.
The breakeven point where those savings start outrunning the compliance costs sits around $45,000 to $60,000 in annual net business income. Below that, payroll processing, the extra tax return, and CPA fees eat most or all of the tax benefit. Above $80,000 in net income, the S corp election generally pays for itself, and the gap widens as income grows.