To form an S corporation in Michigan, you file Articles of Incorporation with the Department of Licensing and Regulatory Affairs (LARA), then elect S status with the IRS by filing Form 2553. Michigan itself does not have a separate S corporation election; once the IRS accepts your federal election, the state treats the entity as a flow-through for income tax purposes. The corporation avoids Michigan’s 6% Corporate Income Tax, and shareholders pay Michigan’s flat 4.25% individual rate on their share of the profits.
Confirm Your Corporation Qualifies for S Status
S corporation status is a federal tax election, not a separate business entity. The IRS sets the eligibility rules under Subchapter S, and Michigan adds nothing on top. Before you spend money on filing fees, check that your corporation can meet every one of these:
- Organized in the United States.
- No more than 100 shareholders. Family members can elect to be treated as a single shareholder for this count.
- Shareholders limited to individuals, certain trusts, and estates. Partnerships, other corporations, and nonresident aliens cannot hold shares.
- Only one class of stock. Differences in voting rights alone do not create a second class.
- Not an ineligible corporation, meaning certain financial institutions, insurance companies, and domestic international sales corporations are shut out.
Losing any of these qualifications terminates the election automatically, so the shareholder roster needs ongoing attention, especially when ownership changes hands.1Internal Revenue Service. S Corporations
Step 1: File Articles of Incorporation With LARA
Before you can make the S election, you need an actual corporation. In Michigan, that means filing Articles of Incorporation with LARA. The filing fee is a $10 nonrefundable fee plus a share-based fee that starts at $50 for up to 60,000 authorized shares, bringing the minimum total to $60. Authorizing more shares increases the fee, reaching $100 for up to one million shares and scaling up from there.2Michigan Department of Licensing and Regulatory Affairs. Domestic Profit and Professional Corporations
Most S corporations authorize a modest number of shares to keep costs down. The single-class-of-stock rule limits what you can do with a complex share structure anyway, so there is rarely a reason to authorize millions of shares at formation.
Step 2: File IRS Form 2553 to Elect S Status
Once the corporation exists, you elect S status by filing Form 2553 with the IRS. The deadline is no more than two months and 15 days after the beginning of the tax year you want the election to take effect. You can also file at any time during the preceding tax year.3Internal Revenue Service. Instructions for Form 2553 – Section: When To Make the Election Every shareholder as of the election date must sign the form consenting to the election.
Missing that deadline is a common mistake, and it is not necessarily fatal. Under Revenue Procedure 2013-30, the IRS grants late-election relief if you file within three years and 75 days of the intended effective date, can demonstrate reasonable cause for the delay, and acted to correct the mistake once you discovered it. The top of Form 2553 should state “FILED PURSUANT TO REV. PROC. 2013-30” and include a signed statement explaining the delay.4Internal Revenue Service. Rev. Proc. 2013-30
Step 3: File the Michigan Annual Report
Michigan requires every domestic corporation to file an annual report with LARA and pay a $25 fee. The report is due by May 15 each year. Late filings trigger escalating penalties: $10 if filed before June 1, climbing to $50 for filings on or after September 1.5Licensing and Regulatory Affairs. Annual Reports and Annual Statements Failing to file can lead to administrative dissolution, which would end the corporation’s existence and the S election with it.
How Michigan Taxes Your S Corporation
No Corporate Income Tax at the Entity Level
Michigan’s Corporate Income Tax applies only to entities that file as C corporations for federal purposes. Under MCL 206.605(1), the CIT defines “corporation” as a person required or electing to file as a C corporation, so S corporations are generally not CIT taxpayers at all.6Michigan Department of Treasury. Corporate Income Tax The narrow exception is an S corporation that also qualifies as a financial institution or insurance company, which would owe CIT on that basis.
Shareholders Pay 4.25% on Their Share
Because S corporation income passes through, each shareholder reports their proportionate share of income, deductions, and credits on their Michigan individual income tax return. Michigan taxes individual income at a flat 4.25% rate.7Michigan Department of Treasury. Calculation of State Individual Income Tax Rate Adjustment for 2025 Tax Year Shareholders owe this tax whether or not the corporation actually distributes the income, which is a cash-flow issue worth planning around before profits build up inside the business.
The Flow-Through Entity Tax Option
Michigan adopted a flow-through entity tax in 2021 that lets S corporations pay state income tax at the entity level instead of having each shareholder pay individually. The FTE tax rate matches the individual income tax rate of 4.25%.8Michigan Department of Treasury. Flow-Through Entity Tax Frequently Asked Questions
The reason it exists: the federal Tax Cuts and Jobs Act capped the state and local tax (SALT) deduction at $10,000 for individuals, which prevents shareholders from fully deducting the Michigan income tax they pay on pass-through income. When the S corporation itself pays the FTE tax, that payment is deductible at the entity level as a business expense, bypassing the SALT cap. Shareholders then receive a refundable credit on their Michigan individual return for their share of the FTE tax the corporation paid, so the same income is not taxed twice.9Michigan Department of Treasury. Flow-Through Entity Tax
The election is made annually, estimated payments are due quarterly on the same schedule as individual estimated taxes, and the annual return is due by March 31 for calendar-year filers. Whether the election makes sense depends on whether your shareholders are already below the SALT cap from other deductions, so it is worth modeling with a tax professional before opting in.
Payroll Taxes
Any S corporation with employees owes the standard federal payroll taxes: Social Security at 6.2% and Medicare at 1.45% on the employer side, plus federal unemployment tax. Michigan also requires state unemployment insurance contributions. Shareholder-employees who receive wages are subject to the same withholding as any other employee. The corporation files Form 941 quarterly for federal purposes and reports state withholding to the Michigan Department of Treasury.
Set Reasonable Compensation for Shareholder-Employees
The IRS pays close attention to how much S corporation shareholders pay themselves in salary versus distributions, because salary is subject to payroll taxes and distributions are not. Paying yourself an unreasonably low salary while taking large distributions is one of the fastest ways to trigger an audit.
There is no bright-line dollar figure that qualifies as “reasonable.” The IRS and tax courts evaluate compensation based on what comparable businesses pay for similar roles, the time and effort you devote to the business, your training and experience, and the corporation’s dividend history. The most heavily weighted factor tends to be what similar companies in your area pay someone to perform the same duties. If the corporation regularly takes in substantial revenue but pays its owner-operator a below-market salary while distributing the rest, that pattern draws scrutiny.
A common approach is to research salary data for your role and industry using sources like the Bureau of Labor Statistics, then document the rationale in a board resolution or employment agreement. That paper trail demonstrates good faith if the IRS ever questions the split.
Health Insurance for Shareholders Owning More Than 2%
S corporations that pay health insurance premiums for shareholders owning more than 2% of the stock face a reporting requirement that trips up a lot of businesses. The premiums must be added to the shareholder-employee’s W-2 wages in Box 1, making them subject to federal income tax withholding. The premiums are exempt from Social Security and Medicare taxes, so they should not appear in Boxes 3 or 5.
Handled correctly, the shareholder can deduct the full premium amount on their personal return as a self-employed health insurance deduction, which comes off adjusted gross income rather than requiring itemization. To claim it, the S corporation must have established the plan, the premiums must be properly reported on the W-2, and the shareholder cannot have access to subsidized health insurance through a spouse’s employer or another source.
Section 199A Qualified Business Income Deduction
S corporation shareholders may be eligible for the Section 199A deduction, which allows a deduction of up to 20% of qualified business income on their personal returns. The deduction was originally enacted for tax years 2018 through 2025.10Internal Revenue Service. Qualified Business Income Deduction Federal legislation signed in 2025 extended the deduction into 2026, with phase-out thresholds for the 2026 tax year beginning at $201,750 for single filers and $403,500 for joint filers. Above those thresholds, the deduction phases out for specified service trades or businesses such as law, accounting, health care, and consulting.
The deduction interacts with reasonable compensation in an important way: only the business income that passes through to shareholders qualifies, not the W-2 wages the corporation pays them. Setting compensation too high relative to distributions can shrink the QBI deduction, while setting it too low invites IRS scrutiny. Getting both numbers right in tandem is where good tax planning earns its keep.
Keep Up the Corporate Formalities
Michigan’s Business Corporation Act requires corporations to follow basic governance rules. These are what separate the corporation as a legal entity from its owners, which is the entire basis for limited liability protection.
- Hold at least an annual meeting of shareholders and regular meetings of directors, and document each one with written minutes. If a court is asked to “pierce the corporate veil” and hold shareholders personally liable, one of the first things it examines is whether the corporation actually operated like a corporation.
- Adopt bylaws that cover officer roles, voting procedures, and decision-making, and review them periodically so they match how the business actually operates.
- Maintain accurate books, including a general ledger and financial statements. Sloppy records create problems that compound at tax time and during any ownership transition.
For S corporations with a handful of shareholders who also serve as directors, formal meetings can feel pointless. Skipping them is the single most common governance failure that leads to personal liability exposure.
Revoking or Losing S Status
An S corporation can voluntarily give up its status by filing a revocation statement with the IRS. Shareholders owning more than 50% of all outstanding shares (including nonvoting shares) must consent. If the revocation is filed on or before the 15th day of the third month of the tax year, it takes effect retroactively to January 1 of that year. Filed after that date, it takes effect the following January 1. You can also specify a prospective effective date as long as it falls on or after the filing date.
The election also terminates automatically if the corporation stops meeting any federal eligibility requirement: exceeding 100 shareholders, issuing a second class of stock, admitting an ineligible shareholder, or generating more than 25% of gross receipts from passive investment income for three consecutive years while holding accumulated C corporation earnings.1Internal Revenue Service. S Corporations
Once revoked or terminated, the corporation generally cannot re-elect S status for five tax years without IRS consent, so this is not a decision to make lightly.