The cost to start an S Corp typically runs $500 to $5,000 up front, with another $3,000 to $8,000 in compliance costs each year after that. The spread reflects choices you’ll make: whether you hire a CPA or attorney, which state you form in, and how you handle payroll. Remember that an S Corp isn’t a separate entity type. It’s a federal tax election layered onto an LLC or corporation, so you’re paying for two things: forming the underlying business and then electing the tax status that lets profits pass through to your personal return.
What You Pay to Form the Underlying Entity
The state filing fee to create an LLC or corporation ranges from about $35 to $500, depending on where you file. Most states land between $50 and $200, averaging around $130 for an LLC. Some states pile on an initial franchise tax or minimum tax at formation, adding several hundred dollars before your business earns anything. A few states require LLCs to publish a formation notice in local newspapers, which can run several hundred dollars on its own. Publication mandates are uncommon but worth checking for.
Every formally organized entity also needs a registered agent to receive legal documents and government mail. You can be your own agent in most states, but a commercial service keeps your home address off public filings and makes sure nothing gets missed. First-year fees generally run $100 to $150, with annual renewals in the same range. If you’re forming in a state where you don’t physically operate, a commercial agent is effectively required.
Filing the S Corp Election Itself
The election happens on IRS Form 2553, and there’s no filing fee. Every shareholder has to sign it, and the IRS processes it for free. Your only cost is the time to prepare it, whether that’s yours or a professional’s.
Timing is where this gets expensive if you slip. To have the election take effect for the current tax year, Form 2553 has to be filed no later than two months and 15 days after the tax year begins. For a calendar-year business, that’s March 15. You can also file any time during the preceding tax year. Miss the window and the election won’t apply until the following year, which means another 12 months of paying self-employment tax on all your net income.
Late-election relief is available if you file within three years and 75 days of the intended effective date and can show reasonable cause. All shareholders need to have reported their income consistently with S Corp status, and you’ll attach a reasonable cause statement. Outside that relief window, the only fix is a private letter ruling, and IRS user fees for those start at $3,500 and can exceed $28,000 depending on your gross income. It’s an expensive way to recover from a missed deadline.
What Professional Help Adds to Setup
You can do the whole formation yourself for just the state filing fee and some research time. Most owners don’t. There are three common paths, each covering different ground.
Online filing services handle the paperwork for roughly $50 to $300 on top of state fees. They submit formation documents and may bundle in registered agent service or an EIN application. The EIN is free from the IRS directly, so be cautious of any service charging for it as a standalone line item. These platforms work fine for straightforward single-owner setups but offer little strategic guidance.
A CPA usually charges $750 to $2,000 to handle the corporate setup and the S Corp election together, depending on ownership complexity and how many states you need to register in. What you get is tax-planning input on shareholder allocations, fiscal year selection, and confirmation that you meet every eligibility requirement before filing.
Business attorneys are the highest upfront cost, typically $1,500 to $3,500 for a standard small business. That buys you a customized operating agreement (LLC) or bylaws (corporation) covering ownership rights, management authority, and exit terms. For a single-owner business with modest assets, this can be overkill. For multi-owner ventures or businesses with meaningful intellectual property, skipping the attorney is where problems tend to start.
Payroll Setup: The Cost That Surprises New Owners
This is where S Corp economics diverge sharply from a sole proprietorship. The IRS requires every owner who works in the business to draw a “reasonable compensation” salary before taking any profit distributions. Salary carries Social Security and Medicare tax; distributions don’t. Without the salary requirement, owners could take everything as distributions and skip payroll tax entirely.
Paying yourself a salary means running actual payroll. Most owners use a third-party provider. Initial setup to configure federal and state tax accounts runs $100 to $500. Monthly processing then costs $50 to $150 for a single-employee payroll, which covers tax calculations, withholding deposits, quarterly Form 941 filings, and year-end W-2s.
Setting the salary itself is more art than science, and it’s one of the most common S Corp audit triggers. The IRS weighs the owner’s training and experience, time devoted to the business, duties performed, and what comparable businesses pay for similar roles. Set it too low and the IRS can reclassify distributions as wages, which means back employment taxes plus penalties and interest. Some owners pay a CPA or compensation specialist $300 to $1,000 for a formal reasonable compensation analysis, which creates a documented defense if the question ever comes up.
On top of the salary, the S Corp owes the employer share of FICA: 6.2% for Social Security on wages up to $184,500 in 2026, plus 1.45% for Medicare on all wages with no cap. There’s also federal unemployment tax at an effective 0.6% on the first $7,000 of each employee’s wages, plus state unemployment insurance. For a single owner-employee earning $60,000 in salary, employer-side payroll tax alone runs roughly $5,300 a year. That’s real money, though it’s offset by the self-employment tax you avoid on your distributions, which is the whole point of electing S Corp status.
Recurring Annual Costs
The startup spend happens once. The compliance spend repeats every year, and it’s the part new owners consistently underestimate.
State Fees and Registered Agent Renewal
Most states require an annual report or franchise tax payment to keep the entity in good standing, whether or not the business earned anything. These fees range from nothing in a few states to several hundred dollars in others, with a handful charging $500 or more. Registered agent service renews annually at $100 to $300. Missing a state filing deadline can lead to administrative dissolution, which would also kill your S Corp election.
The 1120-S Return
The S Corp files its own federal return on Form 1120-S, separate from your personal return. It requires complete financial statements and generates a Schedule K-1 for each shareholder reporting their share of income, deductions, and credits. K-1 data then flows to your personal Form 1040. CPAs typically charge $750 to $2,500 for 1120-S preparation, scaling with transaction volume and shareholder count. That’s on top of your personal return, which also gets more complex once a K-1 is involved.
Ongoing Payroll Processing
Your payroll provider’s monthly fee continues for as long as the S Corp exists and you’re drawing a salary. At $50 to $150 per month, budget $600 to $1,800 per year for a single owner-employee. It covers quarterly 941 deposits, year-end W-2s, and state payroll filings. Adding employees increases per-employee fees.
Quarterly Estimated Taxes
Because S Corp income flows through to your personal return, you’ll owe estimated taxes on both your salary (to the extent withholding doesn’t cover the full liability) and your share of business profits. Payments are due April 15, June 15, September 15, and January 15 of the following year. Underpayment triggers an interest-based IRS penalty. Your accountant can help estimate the amounts, but the quarterly discipline is on you.
Penalties That Explain Why Compliance Costs What It Does
The compliance spending exists because the penalties for getting it wrong are steep.
Filing Form 1120-S late triggers a penalty for each month the return is overdue, up to 12 months. It applies per shareholder, so a two-owner S Corp pays double. The base amount is $195 per shareholder per month, adjusted annually for inflation, currently above $250. A two-shareholder S Corp that files six months late owes more than $3,000. Reasonable cause can get the penalty waived; forgetting doesn’t count.
Underpaying yourself is the other major risk. If the IRS decides your salary was unreasonably low relative to your duties and the business’s income, it can reclassify distributions as wages. That triggers back Social Security and Medicare taxes on both sides, plus penalties and interest. Employment tax alone is 15.3% on reclassified amounts up to the Social Security wage base, which is $184,500 in 2026. The exposure adds up quickly.
Missing the Form 2553 deadline isn’t technically a penalty, but delaying the election a full year means paying self-employment tax of 15.3% on all your net business income for that extra year. On $100,000 of net profit, that’s roughly $14,100 in avoidable tax.
When the Numbers Actually Work
All of these costs only make sense if the tax savings exceed them. The savings come from one place: the profit you take as distributions rather than salary avoids 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 the salary portion.
The breakeven point 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 your savings. Above it, the election starts paying for itself, and the gap widens as income grows. If your business nets $30,000, a sole proprietorship is the cheaper answer. If it nets $80,000 or more and you can live with the administrative overhead, the S Corp election is almost certainly worth what it costs to run.