New York S Corporation: Election, Franchise Tax, and PTET

Running a New York S corporation means clearing two separate elections, paying a fixed-dollar state franchise tax every year no matter how the business performs, and, if you operate in New York City, paying a city corporate tax that ignores your S status entirely. Below the surface are rules about paying yourself a reasonable salary, making estimated payments for nonresident shareholders, and an optional pass-through entity tax that can recover some of the federal SALT deduction the cap took away.

Who Can Be an S Corporation

New York’s S election rides on top of the federal one, so the federal eligibility rules come first. The corporation must be a domestic entity, cannot be an ineligible type of business (certain financial institutions using the reserve method for bad debts, insurance companies taxed under Subchapter L, or a DISC or former DISC), and is capped at 100 shareholders.¹ Shareholders must be individuals, estates, or certain qualifying trusts. Partnerships, other corporations, and nonresident aliens cannot hold shares.² Only one class of stock is allowed, though differences in voting rights alone do not create a second class.

Forming the Corporation

File a Certificate of Incorporation with the New York Department of State. Under Business Corporation Law Section 402, the certificate lists the corporation’s name, purpose, the county of its office, the number and type of authorized shares, and a designation of the Secretary of State as agent for service of process with a mailing address for forwarding legal papers.³ The filing fee is $125, with expedited processing available for extra.⁴

After incorporating, apply for an Employer Identification Number with the IRS. The online application is free, takes minutes, cannot be saved partway through, and times out after 15 minutes of inactivity.⁵ Form the corporation with the state first, since the IRS may hold up an EIN application otherwise.

Adopt bylaws covering director roles, shareholder meetings, and decision-making. Bylaws are not filed with the state, but they become important if anyone ever challenges how a decision was made. You can also designate a registered agent in addition to the Secretary of State to handle service of process.³

Making the S Election

Incorporating does not give the business S corp treatment. Two separate elections are required.

Federally, file IRS Form 2553 no more than two months and 15 days after the beginning of the tax year the election should take effect, or any time during the preceding tax year.⁶ If you miss the window, the IRS offers late-election relief in some circumstances.⁷

For New York, file Form CT-6 with the Department of Taxation and Finance by the 15th day of the third month of the tax year, or any time during the prior tax year. A newly incorporated business seeking S treatment for its first year must file CT-6 by the 15th day of the third month after the effective date of its Certificate of Incorporation.⁸ All shareholders must consent, and the corporation must already be a federal S corp or have a pending federal election.

One trap catches investment-heavy businesses. If a federal S corporation’s investment income exceeds 50% of its federal gross income for the year, New York deems the corporation to have made the state S election, and it must file as an S corp whether or not it ever submitted CT-6.⁹

The State Franchise Tax

Federal S corp income passes through to shareholders and is not taxed at the corporate level. New York follows suit on income but still charges every S corp a fixed-dollar minimum franchise tax based on New York receipts. The schedule for S corps (other than qualified manufacturers or qualified emerging technology companies) is:¹⁰

$25 for New York receipts of $100,000 or less
$50 for receipts over $100,000 up to $250,000
$175 for receipts over $250,000 up to $500,000
$300 for receipts over $500,000 up to $1,000,000
$1,000 for receipts over $1,000,000 up to $5,000,000
$3,000 for receipts over $5,000,000 up to $25,000,000
$4,500 for receipts over $25,000,000

Qualified New York manufacturers and qualified emerging technology companies pay reduced minimums, ranging from $19 to $3,375 across the same brackets.¹⁰ The S corp ceiling is $4,500, not the $200,000 maximum that applies to C corporations under Article 9-A.¹¹

Filing the Return

New York S corps file Form CT-3-S instead of Form CT-3. The return is due within two and a half months after the end of the reporting period — March 15 for calendar-year filers. Attach Form CT-34-SH, which reports each shareholder’s share of income, deductions, and credits for their personal state returns. If you cannot meet the deadline, submit Form CT-5.4 for a six-month extension and pay the properly estimated franchise tax by the original due date. There is no extension beyond six months.⁹

MTA Surcharge

Corporations doing business in, owning or leasing property in, employing capital in, or deriving receipts from the Metropolitan Commuter Transportation District also file Form CT-3-M and pay the MTA surcharge. The MCTD covers New York City’s five boroughs plus Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester counties.¹² The surcharge is a percentage of the franchise tax attributable to activity inside the MCTD, and the rate is adjusted periodically.

New York City Doesn’t Recognize S Corps

This is the surprise that catches many owners off guard. New York City has no S election of its own and does not honor the state’s election either.¹³ An S corp doing business in the city owes a separate city corporate tax on top of the state franchise tax.

Since 2015, S corporations in the city file under the General Corporation Tax, while other corporations moved to the Business Corporation Tax.¹⁴ The GCT’s top rate on net income is 8.85%. In practice, S corp income is taxed at the city level on the corporation and again at the personal level on the shareholders, partially undoing the pass-through benefit that draws people to S corps in the first place. For businesses concentrated in the five boroughs, this second layer is worth pricing in before choosing an entity.

The Pass-Through Entity Tax

New York’s pass-through entity tax, or PTET, is an optional workaround for the $10,000 federal cap on state and local tax deductions. When an eligible S corp elects PTET, the tax is paid at the entity level rather than by individual shareholders. Because the business pays it, it is not subject to the SALT cap. Shareholders then claim a credit on their personal New York returns for the tax the entity already paid.¹⁵

The election is made online each year between January 1 and March 15, and is irrevocable after the due date of the entity’s first estimated PTET payment for that year.¹⁶ Rates are graduated on the entity’s taxable income. For shareholders in higher brackets who itemize, PTET often produces meaningful savings, at the cost of another layer of estimated payments and compliance work.

If the corporation has nonresident shareholders, PTET interacts with the estimated payment rules below. An S corp that has elected PTET for the current year may factor in the PTET credit when calculating estimated income tax owed on behalf of nonresident shareholders.¹⁷

Paying Yourself a Reasonable Salary

The big federal tax advantage of an S corporation is that only salary, not distributions, is subject to employment taxes. The IRS has been auditing this for years. Any shareholder providing more than minor services to the corporation is an employee and must receive reasonable compensation as wages before taking distributions.¹⁸

There is no formula. The IRS and courts weigh factors like training and experience, day-to-day duties, hours worked, market pay for the role, and the profitability of the business. Minimal salaries alongside large distributions draw scrutiny.

The cost of getting it wrong is heavy. The IRS can reclassify distributions as wages, triggering back employment taxes on both the employer and employee sides, interest, and accuracy-related penalties of 20% to 40%. Officers can also face the trust fund recovery penalty, which creates personal liability for 100% of the unpaid employee-side taxes.

Wages to shareholder-employees are subject to FICA totaling 15.3%: Social Security at 12.4% on earnings up to the $184,500 wage base for 2026, and Medicare at 2.9% with no cap.¹⁹ Distributions above reasonable compensation escape FICA and self-employment tax, and that gap is where the S corp savings come from. Setting salary too high wastes the benefit; setting it too low invites reclassification. The goal is a defensible number in between.

Payments for Nonresident Shareholders

If the S corp has nonresident individual shareholders, the corporation itself must make estimated tax payments on their behalf using Form IT-2658 whenever it earns New York-source income.¹⁷

Payments for 2026 are due April 15, June 15, September 15, and January 15, 2027. Within 30 days of each payment, the corporation must send the shareholder a statement showing the amount paid on their behalf. The statement cannot be a W-2 or any form suggesting the payment is withheld income tax; it must show the payment is estimated tax to be credited when the shareholder files their New York return.¹⁷

Exceptions exist. No estimated payment is required if the total estimated New York tax for the year is $300 or less per tax type. Shareholders who file Form IT-2658-E, a certificate of exemption, can opt out. If the corporation files a group return that includes the shareholder, separate estimated payments are not needed for that individual.¹⁷

Ongoing Compliance

Keeping S corporation status is easier than getting it back, so the governance basics matter. Hold annual shareholder and director meetings and record decisions in written minutes. Keep corporate finances in separate bank accounts; commingling personal and business funds is one of the quickest ways to lose liability protection. Document officer appointments, significant contracts, and changes in direction through board resolutions. If shareholders blur the line between themselves and the corporation, a court can pierce the corporate veil and hold them personally liable for corporate debts.

New York also requires every business corporation to file a biennial statement with the Department of State every two years. It lists the name and business address of the chief executive officer, the street address of the principal executive office, the address for forwarding process from the Secretary of State, and the number of directors on the board along with how many are women. The filing fee is $9.²⁰ A corporation that fails to file will be marked past due, which can interfere with getting a Certificate of Status or completing certain business transactions.

Losing S Corporation Status

If S status is lost, the business becomes a C corporation federally and at the state level, meaning income is taxed at the corporate level and again as dividends when distributed.

Voluntary Revocation

To voluntarily revoke federally, shareholders holding more than 50% of all issued and outstanding shares (voting or nonvoting) must consent. The corporation files a statement of revocation with the IRS service center where it originally sent Form 2553.²¹ A separate revocation should also go to the New York Department of Taxation and Finance to terminate the state election.

Involuntary Termination

The election terminates automatically if the corporation stops meeting eligibility. Common triggers: exceeding 100 shareholders, issuing a second class of stock, or letting an ineligible shareholder (a partnership, another corporation, a nonresident alien) acquire shares.¹ Termination takes effect on the date of the disqualifying event, not at year end.

The Five-Year Lockout

Once an S election is terminated or revoked, the corporation generally cannot re-elect S status for five tax years without IRS consent. The clock starts from the first tax year the termination took effect. The IRS grants waivers in some cases, but not automatically; the corporation typically has to show the original termination was inadvertent or that circumstances have changed. Protecting the election through steady compliance is far easier than trying to recover it.

1
Office of the Law Revision Counsel. 26 U.S.C. 1361 – S Corporation Defined
2
Internal Revenue Service. S Corporations
3
New York State Senate. New York Business Corporation Law 402 – Certificate of Incorporation; Contents
4
New York Department of State. Fee Schedules
5
Internal Revenue Service. Get an Employer Identification Number
6
Internal Revenue Service. Instructions for Form 2553 – Section: When To Make the Election
7
Internal Revenue Service. Filing Requirements for Filing Status Change
8
New York State Department of Taxation and Finance. Instructions for Form CT-6
9
New York State Department of Taxation and Finance. Instructions for Form CT-3-S New York S Corporation Franchise Tax Return
10
New York State Department of Taxation and Finance. Instructions for Form CT-3-S New York S Corporation Franchise Tax Return
11
Department of Taxation and Finance. Definitions for Article 9-A Corporations
12
New York State Department of Taxation and Finance. Instructions for Form CT-3-M General Business Corporation MTA Surcharge Return
13
New York City Department of Finance. General Corporation Tax – GCT
14
NYC Business. General Corporation Tax
15
New York State Department of Taxation and Finance. Pass-Through Entity Tax (PTET)
16
New York State Department of Taxation and Finance. Pass-Through Entity Tax (PTET)
17
New York Department of Taxation and Finance. Instructions for Form IT-2658 Report of Estimated Tax for Nonresident Individual Partners and Shareholders
18
Internal Revenue Service. Wage Compensation for S Corporation Officers
19
Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security
20
New York Department of State. Biennial Statements for Business Corporations and Limited Liability Companies
21
Internal Revenue Service. Revoking a Subchapter S Election