S-Corp Election in Colorado (Form 2553) (2026)

Fact-checked by the LegalGlass editorial team against primary sources · Published Aug 6, 2026 · Last updated Aug 6, 2026

You make an S-corp election in Colorado by filing IRS Form 2553 with the IRS, generally within 2 months and 15 days after the start of the tax year the election takes effect (by March 15 for a calendar-year business). Colorado has no separate state S election: it recognizes your federal S status, and the entity files Colorado Form DR 0106.

What an S-Corp Election Is (and Is Not)

An S-corp election is a federal tax status, not a type of business entity. You do not "form an S corporation" in Colorado; instead an existing corporation or Colorado LLC elects to be taxed under Subchapter S of the Internal Revenue Code. When the election is in effect, the business itself generally pays no federal income tax; profits and losses pass through to the owners, who report them on their personal returns.

Owners who work in an S corporation become employees and must be paid a reasonable salary subject to payroll taxes, while remaining profit distributions are not subject to self-employment tax. That payroll-tax difference is the main reason small businesses consider the election. Compare the trade-offs on our S-corp vs LLC page, and read the general business tax overview for context.

S-Corporation Eligibility Requirements

The Internal Revenue Code limits which businesses may elect S status. To qualify, the entity must be a domestic corporation or an eligible domestic entity (such as an LLC) that:

• has no more than 100 shareholders (certain family members count as one);
• has only allowable shareholders - U.S. individuals, certain trusts, and estates, but not partnerships, corporations, or nonresident-alien shareholders;
• has only one class of stock; and
• is not an ineligible corporation (such as certain financial institutions or insurance companies).

An LLC that files Form 2553 is treated as having elected to be classified as a corporation and then taxed as an S corporation, so a separate entity classification election on Form 8832 is usually not required. The statutory conditions appear in 26 U.S.C. § 1361.

How and When to File Form 2553

You elect S status by completing Form 2553 and filing it with the IRS. The form asks for the entity name, EIN, date of incorporation or organization, the effective date, and the signature and consent of every shareholder. You need an EIN before filing.

Timing is strict. To take effect for the current tax year, Form 2553 must generally be filed no more than 2 months and 15 days after the beginning of that tax year - March 15 for a calendar-year business - or at any time during the preceding tax year. A business formed mid-year has 2 months and 15 days from the date it began. If you miss the window, the IRS provides late-election relief under Revenue Procedure 2013-30 when you can show reasonable cause. There is no IRS filing fee.

Colorado Recognition and State Returns

Colorado does not have its own S-corporation election. Once the IRS accepts Form 2553, the Colorado Department of Revenue treats the business as an S corporation for state income tax. The entity files Form DR 0106 (the combined Partnership and S Corporation return), and each shareholder reports their share of income on a Colorado individual return.

Colorado imposes a flat individual income tax rate (4.40% statutorily, subject to temporary reductions in some years - confirm the current rate with the Department of Revenue). Colorado also offers a pass-through entity (PTE) election under the SALT Parity Act, letting the S corporation pay Colorado tax at the entity level. Register the business with the Colorado Secretary of State and see Colorado LLC tax filing for the mechanics.

Reasonable Salary and Payroll Obligations

The signature benefit of an S election - avoiding self-employment tax on distributions - comes with a condition: shareholder-employees who provide services must receive reasonable compensation as W-2 wages before taking distributions. The IRS scrutinizes S corporations that pay little or no salary while distributing large profits, and can reclassify distributions as wages plus penalties.

Running payroll means withholding and depositing federal income tax, Social Security, and Medicare, filing Forms 941 and 940, issuing W-2s, and registering for Colorado wage withholding and unemployment insurance. These added costs are why the S election typically pays off only once profits comfortably exceed a reasonable salary. Owners should keep an operating agreement or bylaws consistent with the new tax treatment.

S Corp vs LLC and C Corp Taxation in Colorado

It helps to see where the S election sits among the alternatives. A default Colorado LLC is taxed as a sole proprietorship or partnership, with all net profit exposed to self-employment tax but with the least paperwork. A C corporation (the default for a corporation that makes no election) pays the federal corporate income tax and Colorado corporate income tax at the entity level, and shareholders are taxed again on dividends - the classic double taxation. The S election is the middle path: one layer of tax, plus the chance to split earnings between salary and distributions.

Because Colorado piggybacks on the federal classification, your entity type at the Secretary of State does not change when you elect: an LLC that elects S status is still legally an LLC in Colorado, keeps its registered agent and periodic report obligations, and simply changes how it is taxed. That separation of legal form from tax status trips up many owners, so it is worth stating plainly - the S election never affects your liability shield or your state filings, only your federal and state income tax treatment.

The savings are real only when profit is high enough that a reasonable salary leaves a meaningful distribution. If your Colorado business nets modest profit, the payroll costs, extra bookkeeping, and separate Form 1120-S and DR 0106 filings can outweigh the self-employment tax you save. Many owners therefore start as a plain LLC and elect S status later, once revenue is stable, rather than electing at formation. The S-corp vs LLC comparison walks through the break-even math.

Colorado adds one more wrinkle: the state's pass-through entity (PTE) election interacts with the S election, because an S corporation can pay Colorado tax at the entity level to work around the federal SALT deduction cap. That choice is separate from the federal Form 2553 election and is made on the Colorado return, so coordinate the two with your tax preparer.

Common Mistakes and When the Election Makes Sense

Frequent errors include missing the 2-month-15-day deadline, forgetting a shareholder signature, electing while an ineligible shareholder holds an interest, and paying an unreasonably low salary. Because Colorado follows the federal classification automatically, a defective federal election also undermines your state filing, so keep the IRS acceptance letter (CP261) with your records.

The election tends to make sense when the business is consistently profitable beyond what a reasonable salary would consume, the owners are U.S. individuals, and the payroll and bookkeeping burden is manageable. For a brand-new or low-profit venture, the default LLC taxation is often simpler. Confirm eligibility under 26 U.S.C. § 1362 and file Form 2553 on time.

Finally, remember that the election is ongoing: once in effect it continues year to year until revoked or terminated, and blowing an eligibility rule (for example, admitting an ineligible shareholder) can end it involuntarily. Keep your operating agreement, cap table, and payroll records aligned with S-corp requirements every year, not just at the start.

Frequently Asked Questions

What is the deadline to file Form 2553 in Colorado?

File Form 2553 with the IRS no later than 2 months and 15 days after the start of the tax year you want the S election to take effect - March 15 for a calendar-year business - or during the prior tax year. Colorado has no separate deadline.

Does Colorado have its own S-corporation election?

No. Colorado does not require a separate state election. Once the IRS accepts your federal Form 2553, the Colorado Department of Revenue treats the business as an S corporation and it files Form DR 0106.

How much does it cost to make an S-corp election?

The IRS charges no fee to file Form 2553. Your only related costs are getting an EIN (free) and, in practice, payroll and accounting services once the S corporation begins paying W-2 wages.

Can a Colorado LLC elect to be taxed as an S corporation?

Yes. An eligible LLC can file Form 2553 to be taxed as an S corporation; the IRS treats the filing as also electing corporate classification, so a separate Form 8832 is usually unnecessary.

What tax return does a Colorado S corporation file?

A Colorado S corporation files federal Form 1120-S and Colorado Form DR 0106. Shareholders report their share of income on their personal federal and Colorado returns.

Do S-corp owners have to take a salary?

Yes. Shareholder-employees who work in the business must be paid reasonable compensation as W-2 wages subject to payroll taxes before taking profit distributions, or the IRS can reclassify distributions as wages.

Related

• S-Corp vs LLC: which is better
• Business tax overview
• How to get an EIN
• How to form an LLC in Colorado
• Colorado LLC tax filing
• Self-employment tax calculator

Sources

1. IRS - About Form 2553, Election by a Small Business Corporation.
2. IRS - Instructions for Form 2553 (2 month 15 day deadline; late-election relief).
3. IRS - S Corporations (federal S-corporation rules).
4. IRS - About Form 1120-S (income tax return for an S corporation).
5. IRS - S Corporation Compensation (reasonable-salary rule).
6. IRS - About Form 8832, Entity Classification Election.
7. IRS - Limited Liability Company (LLC) (federal default classification).
8. IRS - Get an Employer Identification Number (EIN is free from the IRS).
9. Cornell LII - 26 U.S. Code § 1361, S corporation defined.
10. Cornell LII - 26 U.S. Code § 1362, Election; revocation; termination.
11. Colorado Secretary of State - Business & Licensing Home.
12. Colorado Department of Revenue - Pass-Through Entities (SALT Parity / PTE election).
13. Colorado Department of Revenue - Corporate Income Tax.
14. Colorado Department of Revenue - Individual Income Tax (state flat rate).
15. Colorado Department of Revenue - Forms (DR 0106 S corporation return).

LegalGlass provides general information for educational purposes and is not a law firm or a substitute for advice from a licensed attorney or tax professional. Laws, fees, and thresholds change; verify current requirements with the relevant state agency and the IRS before acting.