File a Nevada S Corp

Considering establishing your business as an S corporation? Nevada might just be the perfect location for this venture. Renowned for its absence of state income taxes, both corporate and personal, Nevada offers an appealing backdrop for entrepreneurs exploring federal tax advantages through an S corp. But what exactly does it mean to operate as an S corp in Nevada, and what steps are involved in creating one? Moreover, how can this decision impact your business financially?

Opting for S corp status can be particularly advantageous for limited liability companies (LLCs) in Nevada, potentially leading to reductions in self-employment taxes under certain conditions. Similarly, for businesses initially formed as C corporations, transitioning to an S corp can help circumvent the burden of double taxation, aligning more closely with your financial and operational goals.

Requirements and Limitations of S Corporations

There are a few S corp filing requirements and limitations you should be aware of before you begin this process. Specifically, the Internal Revenue Code states that to qualify for S corporation status, an entity must:

• Be a domestic corporation or limited liability company
• Not have more than one class of stock
• Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
• Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations

if your business entity meets these requirements, you can apply for an S corporation election. 

Nevada S Corp Filing

To file as an S corporation in Nevada, you’ll need to create either an LLC or a corporation if you haven’t already done so. Then, you’ll file an election form with the Internal Revenue Service.

Nevada-Specific Considerations

In an S corp, the business itself doesn’t usually pay federal income taxes. But what about state income taxes?

Most other states treat S corporations the same way the federal government does for income taxes. That is, if the company doesn’t pay federal income taxes on its profits, it doesn’t pay state income taxes, either.

But Nevada doesn’t have a corporate income tax or a personal income tax at the state level. Initially, that may seem to let you and your business off the hook for state income taxes, but not necessarily. Nevada has a Modified Business Tax and a Commerce Tax, either of which could apply to your S corporation depending on certain factors.

Modified Business Tax

Regardless of business entity type, Nevada employers (specifically, those subject to Nevada Unemployment Compensation Law) must pay the Modified Business Tax on their total gross wages, minus any employee health care benefits paid by the employer. “Total gross wages” are the total amount of all gross wages and reported tips paid for a calendar quarter, as reported to the Employment Security Division on form NUCS 4072.

The Modified Business Tax rate for most general business employers is 1.378% on wages after deduction of health benefits paid by the employer and certain wages paid to qualified veterans. However, the first $50,000 of gross wages is not taxable. (These numbers are accurate as of 2023.) All employers will need to file a tax return, even if the taxable wages are less than $50,000 and the tax due is $0. Financial institutions have a separate Modified Business Tax rate.

Non-profit organizations, Indian tribes, political subdivisions, and employers with household employees only are excluded from the Modified Business Tax.

Commerce Tax

The Commerce Tax is a tax on the privilege of doing business in Nevada. It applies to most business types, including LLCs and corporations, with or without S corporation status. However, unless your Nevada gross revenue in a taxable year exceeds $4,000,000, you don’t have to pay it or file a Nevada Commerce Tax return.

The tax rate for those business entities that must pay the Commerce Tax varies by industry, ranging from 0.051% to 0.331%.

Nevada Business License

Though not a tax per se, most business entities in Nevada are required to get a State Business License. This includes LLCs and corporations, regardless of S corporation status. The state license fee is $500 for corporations and $200 for all other business types. The license must be renewed annually for the same fee.

S-Corp Election Steps for LLCs

For detailed formation steps, see our Nevada LLC formation guide.

• Step 1 – Choose a name
• Step 2 – Choose a registered agent
• Step 3 – File Nevada Articles of Organization
• Step 4 – Create an operating agreement
• Step 5 – Apply for an EIN
• Step 6 – Apply for S Corp status with IRS Form 2553

S-Corp Election Steps for Corporations

For detailed formation steps, see our Nevada Corporation formation guide.

• Step 1 – Name Your Nevada Corporation
• Step 2 – Appoint Directors
• Step 3 – Choose a Nevada Registered Agent
• Step 4 – File the Nevada Articles of Incorporation
• Step 5 – Create Corporate Bylaws
• Step 6 – Draft a Shareholder Agreement
• Step 7 – Issue Shares of Stock
• Step 8 – Apply for Necessary Business Permits or Licenses
• Step 9 – File for an EIN and Review Tax Requirements
• Step 10 – Submit Your Corporation’s First Report
• Step 11 – Apply for S Corp status with IRS Form 2553

File the form to apply for S corp status

Submit Form 2553 to apply for S corp status. Once your Nevada corporation or LLC formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, to get S corp status. 

The Internal Revenue Service requires that you complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

One caveat for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

Visit the Internal Revenue Service website for more information on when and how to file Form 2553.

Pros and Cons of Filing as an S Corp

While S corp classification does come with a number of tax advantages for some businesses, making this election might not be right for all business types. So, you’ll need to carefully weigh the pros and cons before deciding how you want to proceed. Consult a tax professional about whether the S corp election would be best for your business.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corp for an LLC differ from those for C corporations. Let’s look at the advantages for LLCs first.

A traditional LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could save a lot in taxes.

Self-Employment Tax Explained

The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment tax (Social Security and Medicare, which adds up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.

Dividing Salary and Profits

But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $1 and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable compensation”? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” Basically, the IRS considers “reasonable” to be something similar to what others in your field are earning.

If the IRS determines that your salary isn’t reasonable, it has the authority to reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported the IRS’s right to do this.

Advantages of S Corp Status for C Corporations

If you have a C corporation (the default form of corporation), filing as an S corp does have its advantages:

Pass-Through Taxation

One big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, it must pay corporate income tax on the profits. But when those profits are ‌distributed to the individual owners (shareholders) as dividends, they’re taxed a second time on the shareholders’ personal tax returns.

But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.

We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of C corporation taxation aren’t as severe now as they were. 

Writing Off Losses

Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income statements. 

This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of ​​the IRS’s shareholder loss limitations.

Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

Disadvantages of S Corp Status for LLCs

Having an LLC with S corp status can have some drawbacks over a traditional LLC:

Stricter Requirements 

As we listed above, S corporations must adhere to more regulations than a standard LLC or C corporation. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.

More IRS Scrutiny

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corporations more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, S corp owners may want to observe many of the same formalities that C corporations do (such as keeping thorough corporate records), even if they’re not legally required to.

Additional Accounting and Bookkeeping

Having an LLC that files as an S corporation generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will be more complex, as well.

With these added complications, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.

Disadvantages of S Corp Status for C Corporations

S corp status also has its downsides:

Limited Number of Shareholders

As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue later if the corporation expands and goes public.

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have partnerships or corporations as shareholders. C corporations don’t have these limitations.

One Class of Stock

One way corporations attract investors is to offer preferred stock. That’s fine for C corporations, but the IRS doesn’t allow it for S corporations.

More IRS Scrutiny

Because of the extra restrictions S corporations have, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.

We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, but they may also be able to help you find additional tax savings.

S Corp Tax Calculator

The S Corporation tax calculator below lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution.) It will then show you how much money you can save in taxes.

Disclaimer: The savings estimate provided by this tool is for informational purposes only and should not be considered financial, tax, or legal advice. Actual savings may vary depending on individual circumstances and other factors. We recommend consulting with a qualified tax or legal professional before making any decisions regarding your business entity. ZenBusiness, Inc. is not responsible for any actions taken based on the information provided by this tool. Use of this tool does not establish any client relationship with ZenBusiness, Inc.

Get help establishing a Nevada LLC with S corp tax election

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If you want to form an LLC with S corp status, our S corp service can help you do just that. Plus, we offer other services to help you run and grow your business and stay in compliance with state and federal laws. Contact us today to learn more.