File a New Jersey S Corp

Launching an S corporation in New Jersey presents a strategic option for business owners seeking favorable tax treatment. Known as an “S corp,” this special tax designation available to both LLCs and corporations can lead to potential tax advantages. This guide will walk you through the intricacies of starting an S corp in New Jersey, detailing the requirements, benefits, and considerations that come with operating under this tax status in the Garden State.

For a limited liability company (LLC) in New Jersey, choosing an S corp status may offer significant savings on self-employment taxes, while for traditional C corporations, it provides a viable solution to circumvent the double taxation of company profits. Whether you’re a seasoned entrepreneur or new to the business scene, understanding how to effectively establish an S corp in New Jersey can be a crucial step toward optimizing your business’s financial health.

New Jersey S Corporation Filing Requirements

If you want the IRS to accept your application for S corporation election, you must meet the filing requirements of the Internal Revenue Code. To qualify for S corporation tax status, your business must:

• Be a domestic LLC or corporation
• 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)
• Only have one class of stock
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders/members 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.

If your business checks all the boxes above, you can apply for an S corporation election. 

Considerations for New Jersey S Corporation Taxes

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

Until recently (December 2022), New Jersey required S corporations to make a separate S corporation election at the state level to be treated as an S corporation for state income tax purposes. However, that law has been repealed, so New Jersey will automatically treat an S corporation the same way it’s treated for federal income tax purposes.

How to Start an S Corporation in New Jersey

Starting a New Jersey S corporation requires you first to have either a limited liability company (LLC) or a C corporation, so you’ll need to create one if you haven’t already done so. Then, you’ll file an election form with the IRS.

Forming a New Jersey LLC

1. Choosing a name for your LLC
2. Appoint a registered agent
3. Filing your Certificate of Formation
4. Creating an LLC operating agreement
5. Getting an EIN
6. Apply for S Corp status with IRS Form 2553

For more details on these steps, visit our “Start a New Jersey LLC” page.

Forming a New Jersey Corporation

1. Name your Maryland corporation
2. Appoint Directors
3. Choose a Maryland Statutory Agent
4. File the Maryland Articles of Incorporation
5. Create Corporate Bylaws
6. Draft a Shareholder Agreement
7. Issue shares of stock
8. Apply for Necessary Business Permits or Licenses
9. File for an EIN and review tax requirements
10. Submit Your Corporation’s First Annual Report
11. Apply for S Corp status with IRS Form 2553

If you’d instead prefer to form a corporation in New Jersey, see the instructions on our New Jersey corporation page.

File Form 2553 to Apply for federal S corporation status

When your LLC or corporation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corporation status. 

The IRS requires that you complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or C 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 note for LLCs wanting to file as an S corporation: 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. 

Note that all of the shareholders or members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.

Keeping Your New Jersey S Corporation Compliant

Whether your S corp is an LLC or a corporation, you’ll need to perform certain ongoing tasks to keep them in compliance. One of these is to regularly file a New Jersey annual report. This report is intended to keep the state informed about any changes to your business. There’s a $75 filing fee for the report, and it’s due every year on the last day of the month in which you completed your business formation.

Corporations in New Jersey are also required to hold annual shareholder meetings at a time and place established in the bylaws. Keeping corporate records, including the minutes of meetings, is another requirement for New Jersey corporations. 

Note that these may not be the only ongoing requirements for your S corp. For example, you may have business licenses that need to be renewed regularly.

Pros and Cons of S Corp for New Jersey LLCs and Corporations

While S corp status does come with tax advantages for some businesses, making this election might not benefit everyone. Carefully weigh the pluses and minuses before committing to become an S corp. Consult a tax professional about whether the S corportion election would be best for your business.

Advantages of S Corp Status for LLCs

The perks of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. An LLC without S corporation election already has pass-through taxation, so the benefits of S corporation election for an LLC come from federal self-employment tax. We’ll explain.

How Self-Employment Taxes Work

The members of a usual 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 taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is double the taxes they’d pay when working for someone else because their employer pays half of them.

Salary and Profits Divided

But when the members elect S corp status, they can receive money from the business in two ways, by getting their share of the profits and by being employed by the LLC. Once they do that, they only pay taxes for Social Security and Medicare 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 tax on income and all other applicable taxes on their share of the profits and any other taxable income.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation for Pay

One provision to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of your LLC. Otherwise, you could pay yourself an annual salary of $0.08 and avoid contributing anything to Social Security or Medicare. 

But then what’s considered “reasonable compensation”? While the terms aren’t 100% defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning for similar work.

Advantages of S Corp Status for C Corporations

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

No Double Taxation

One big downside to corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the business level. And when those profits are ‌distributed to the shareholders, they’re taxed a second time on the shareholders’ personal tax returns.

But when a C corporation becomes an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them, so you’re spared the corporation business tax. This is called “pass-through taxation.”

Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act of 2017, 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 more details on 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 more).  

Writing Off Losses

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

S Corp Disadvantages for LLCs

Having S corp status isn’t all positive for LLCs, though:

Extra IRS Scrutiny

Because of the “reasonable salary” restrictions, the IRS monitors LLCs filing as S corps more closely. That could mean a greater chance of being audited.

Stricter Requirements 

S corps must meet more conditions than a standard LLC. 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 Accounting and Bookkeeping

Having an LLC with S corporation election 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 start. Your taxes will be more complex, as well.

Disadvantages of S Corp Status for C Corporations

S corp status isn’t all positives for C corps:

One Class of Stock

One way corporations attract investors is to offer preferred stock, but the IRS doesn’t allow this for S corps.

Limited Number of Shareholders

An S corp can have no more than 100 shareholders, while a C corporation has no restriction.

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens, or certain trusts or estates. You also can’t have corporations or partnerships as shareholders. 

More IRS Scrutiny

The extra limitations S corps have mean that the IRS watches them more closely to see if they’re in compliance. Thus, your corporation is more likely to get audited.

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.

NJ and Federal Resources

For more information about how S corps and other pass-through entities are treated in New Jersey and other important tax information, see the New Jersey Department of Treasury website. The IRS website can also provide more information on the federal guidelines for S corporations. Most of all, we recommend having a qualified New Jersey tax advisor. They can help you through legal and financial challenges, helping you get the most benefits from your S corporation.

Branching out of state? See these resources below:

• File a Rhode Island S Corp
• File a North Carolina S Corp
• Register a New Hampshire S Corp

Get help establishing a New Jersey LLC with S corp tax election

Our S corp service can help you start an LLC with S corp election so that you can take advantage of any tax benefits it offers. Plus, we offer other services to help you run and grow your business and stay in compliance. Get started today and make your dream business a reality.