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An S Corporation is not a separate type of business entity. It is a federal tax classification available to qualifying corporations and LLCs that elect to have their business income pass through to shareholders for federal tax purposes.
The S Corp designation is governed by Subchapter S of the Internal Revenue Code. When you elect S Corp status, the business itself generally does not pay federal income tax. Instead, income, losses, deductions, and credits flow through to shareholders, who report them on their personal returns.[10]
Tennessee is one of a small number of states that do not conform to the federal S election. Tennessee imposes two entity-level taxes on corporations and LLCs that do business in the state: the excise tax (6.5% of net earnings) and the franchise tax (0.25% of net worth, with a $100 minimum). An S Corp pays both of these taxes exactly the same way a C Corp does. There is no pass-through treatment at the Tennessee level.[1] [2]
The pass-through treatment that S Corp owners enjoy in many states does not exist in Tennessee. Because Tennessee has no individual income tax on wages, there is nothing for the state to pass S Corp income through to. Instead, the business itself pays franchise and excise tax, and the owners pay no separate Tennessee tax on the income that flows out to them. The federal benefit of the S election, avoiding 15.3% self-employment tax on distributions above a reasonable salary, still applies, and that is the main reason Tennessee business owners elect S Corp status.[1] [8]
For business owners earning roughly $60,000 or more in net business income, the federal self-employment tax savings from the S Corp election can still be significant. Only the salary you pay yourself as a W-2 employee is subject to Social Security and Medicare taxes; distributions beyond reasonable compensation are not, at the federal level.
| Action | Deadline | Notes |
|---|---|---|
| File IRS Form 2553 | Within 2 months and 15 days after the start of the tax year | For a January 1 tax year, the deadline is March 15. Late election relief may be available under IRS Rev. Proc. 2013-30.[3] |
| File Form FAE 170 (Tennessee Franchise and Excise Tax) | April 15 (calendar-year filers) | 15th day of the 4th month after the close of the tax year. S Corps file FAE 170 because the federal S election is not recognized in Tennessee.[2] [11] |
| File Form 1120-S (Federal) | March 15 (calendar-year filers) | Distribute Schedule K-1s to shareholders.[3] |
| Pay quarterly estimated franchise and excise tax | 15th day of the 4th, 6th, and 9th months and the 1st month of the next year | Required if your combined franchise and excise tax liability is $5,000 or more in both the prior and current years.[2] |
| File Tennessee Annual Report | First day of the 4th month after fiscal year end | Filed with the Secretary of State. $20 for corporations; $50 per member for LLCs ($300 minimum, $3,000 maximum).[4] |
| Set up payroll | Before paying yourself a salary | Register with the Tennessee Department of Labor and Workforce Development for unemployment insurance before issuing W-2 wages.[9] |
An S Corp is a tax classification, not a standalone entity. You must have an active Tennessee corporation or LLC on file with the Secretary of State before you can elect S Corp tax treatment with the IRS.
If you want to form an LLC first, check this guide.
If you want to incorporate as a C Corp first, check this guide.
Already have an existing Tennessee LLC or corporation? Move to Step 1.
Form 2553, Election by a Small Business Corporation, is the IRS form that officially elects S Corp tax treatment at the federal level. It must be filed no later than 2 months and 15 days after the beginning of the tax year, for the election to take effect. For a calendar-year corporation electing S Corp status for 2026, the deadline is March 15, 2026.[3]
Form 2553 collects the following information:
All shareholders must sign the consent portion of the form before submission. An unsigned form will be rejected by the IRS.
You can submit Form 2553 by mail or fax. There is no IRS filing fee.
If your principal business office is located in Tennessee, mail Form 2553 to: Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999.[5]
Fax number for Tennessee businesses: 855-887-7734.[5]
Faxing is typically faster than mailing. Keep your fax confirmation receipt. The IRS will issue a CP261 acceptance notice to confirm your S Corporation election.
There is no separate Tennessee S election form because Tennessee does not treat S Corps as pass-throughs. Once the IRS accepts your Form 2553, your business remains subject to the Tennessee franchise and excise taxes. Register with the Tennessee Department of Revenue through the Tennessee Taxpayer Access Point (TNTAP) and file Form FAE 170 each year.[6] [11]
Plan for the franchise and excise tax as part of your cash flow. The S Corp election is a federal tax benefit only. At the Tennessee level, your entity is taxed the same as a C Corp.
As an S Corp shareholder-employee, you are required to pay yourself a reasonable salary through W-2 payroll. The IRS scrutinizes S Corps that pay unreasonably low salaries to avoid payroll taxes.
The IRS expects your salary to reflect what someone performing similar work, in the same industry and the same region, would typically earn. There is no fixed formula, but the IRS flags S Corps where compensation is well below market and most of the owner pay comes through distributions.
Setting your salary too low risks the IRS reclassifying distributions as wages, making them subject to payroll taxes plus penalties and interest.
Choosing a payroll system to process your W-2 salary and withhold taxes
If you do not already have an EIN, apply at no charge on the IRS website (irs.gov). An EIN is a nine-digit federal ID used for tax filings, hiring employees, and opening business accounts.
Note: After obtaining your EIN, open a dedicated business bank account to keep your personal and business finances separate. This is essential to maintain your limited liability protection.
Every Tennessee corporation and LLC must file an annual report with the Secretary of State by the first day of the fourth month after the close of its fiscal year. The corporation annual report fee is $20. The LLC annual report fee is $50 per member, with a $300 minimum and a $3,000 maximum. Failure to file can lead to administrative dissolution.[4]
File IRS Form 1120-S and distribute Schedule K-1s to all shareholders by March 15 (calendar-year filers). File Tennessee Form FAE 170 by April 15, paying the 6.5% excise tax on net earnings and the 0.25% franchise tax on net worth, with a $100 minimum franchise tax.[2] [11]
A six-month federal extension is available by filing Form 7004. Tennessee grants a seven-month extension for the franchise and excise tax return when the requirements are met and any expected balance is paid by the original due date.[2]
Pay quarterly estimated franchise and excise tax if your combined franchise and excise tax liability is $5,000 or more in both the prior and current years. Quarterly payments are due on the 15th day of the 4th, 6th, and 9th months of the tax year and the 1st month of the following year.[2]
Tennessee assesses penalties and interest on late or underpaid franchise and excise tax. Continued non-filing with the Secretary of State can also result in administrative dissolution of the entity. File and pay on time to avoid both.[1]
If you fail to file Form 2553 with the IRS on time, your S Corp election will not take effect for the current tax year. Your business will be taxed as a C Corporation (or as a sole proprietorship or partnership if the underlying entity is an LLC) for federal purposes that year, costing you the federal self-employment tax savings until the next tax year.
The IRS offers late election relief under Revenue Procedure 2013-30. To qualify, you must file within 3 years and 75 days of the intended effective date, demonstrate reasonable cause for the late filing, and confirm that the entity has consistently filed as if the S election were in effect.[3]
At the Tennessee level, a missed federal election does not change your state tax filing. You file Form FAE 170 and pay the Tennessee franchise and excise taxes either way, because the state does not recognize the federal S election.[1] [2]
At the federal level, the S Corp election is revoked by filing a statement of revocation with the IRS, signed by shareholders holding more than 50% of the outstanding shares. The revocation is effective the first day of the tax year if filed by the 15th day of the third month; later filings take effect the following tax year.[3]
At the Tennessee level, no separate revocation is needed because the state does not recognize the federal S election in the first place. The entity continues to file Form FAE 170 either way. Once revoked federally, you generally cannot re-elect S Corp status for five years without IRS consent.[1]
The Tennessee excise tax is 6.5% of net earnings, the entity Tennessee taxable income for the year. An S Corp pays the excise tax exactly as a C Corp does, because the state does not recognize the federal S election. The excise tax is reported on the Franchise and Excise Tax Return, Form FAE 170.[2][11]
The Tennessee franchise tax is 0.25% of the entity Tennessee net worth, the difference between total assets and total liabilities. The minimum franchise tax is $100 and is payable by every entity registered to do business in Tennessee, whether active or inactive. In 2024, Public Chapter 950 removed the alternative property-measure minimum tax base, so the franchise tax is now calculated on net worth (apportioned equity) only, and the Department of Revenue issued related refunds. Confirm current rules before filing.[1] [12]
| Type | Amount |
|---|---|
| Excise tax | 6.5% of Tennessee net earnings (taxable income)[2] |
| Franchise tax | 0.25% of Tennessee net worth, apportioned[2] |
| Minimum franchise tax | $100, payable whether the entity is active or inactive[1] |
| Form filed by S Corps | Form FAE 170, Franchise and Excise Tax Return (same return a C Corp files)[11] |
Tennessee has no individual income tax on wages or salaries. The Hall income tax, which once applied to interest and dividend income, was fully repealed effective January 1, 2021. As a result, Tennessee S Corp shareholders pay no Tennessee individual income tax on their salary or on distributions from the business. The federal income tax still applies to that income at the shareholder level.[8]
The Tennessee general state sales and use tax rate is 7%. A local option rate set by the county or city is added on top of the state rate. If your S Corp sells taxable goods or certain services, register for sales and use tax with the Tennessee Department of Revenue through TNTAP.[7]
| Item | Cost |
|---|---|
| Charter For-Profit Corporation (Form SS-4417) | $100[4] |
| Articles of Organization, LLC (Form SS-4270) | $50 per member, $300 minimum, $3,000 maximum[4] |
| IRS Form 2553 filing | No fee[3] |
| Federal EIN (Form SS-4) | No fee |
| Corporation Annual Report | $20[4] |
| LLC Annual Report | $50 per member, $300 minimum, $3,000 maximum[4] |
| Minimum Tennessee franchise tax (per year) | $100[1] |
| Registered agent change (Form SS-4534) | $20[4] |
| Registered Agent service (typical commercial) | $100 to $300 per year |
| Feature | S Corporation | LLC |
|---|---|---|
| Formation Document | Charter For-Profit Corporation ($100)[4] | Articles of Organization ($300 minimum)[4] |
| Federal Tax Treatment | Pass-through (Form 1120-S) | Pass-through by default (Form 1065 or Schedule C) |
| Tennessee Tax Treatment | Franchise and excise tax on Form FAE 170 (S election ignored)[1] | Franchise and excise tax on Form FAE 170 unless exempt[1] |
| Annual Report | $20 to Secretary of State[4] | $50 per member, $300 minimum[4] |
| Self-Employment Tax (Federal) | Only on W-2 salary | 15.3% on all net earnings |
| Ownership Limits | Max 100 U.S.-person shareholders, one class of stock | Unlimited members, any type |
| Management | Directors and officers required | Flexible; member or manager managed |
| Reasonable Salary Required | Yes | No |
| Minimum Tennessee Franchise Tax | $100[1] | $100[1] |
| Annual Report Deadline | First day of the 4th month after fiscal year end | First day of the 4th month after fiscal year end |
| Best For | Owners earning $60K+ wanting federal SE-tax savings | Small businesses prioritizing simplicity |
The S Corp election makes sense in Tennessee when the federal self-employment tax savings outweigh the cost of running payroll and the additional compliance burden. Remember that the Tennessee franchise and excise taxes apply either way, so the S Corp election is a federal tax question, not a Tennessee one. Use this guide:
| Net Business Income | Recommendation |
|---|---|
| Under $40,000 | An S Corp likely does not make sense. Federal payroll savings are small and Tennessee franchise and excise tax still applies. |
| $40,000 to $60,000 | Borderline. Run the numbers with a CPA. Savings may be modest after payroll-service fees. |
| $60,000 to $100,000 | S Corp election usually saves $2,000 to $5,000 per year in federal self-employment taxes. |
| $100,000 to $200,000 | Strong candidate. Federal savings often $5,000 to $10,000 or more per year. |
| Over $200,000 | Almost always advantageous unless you have specific reasons (foreign investors, IPO plans) to remain a C Corp or LLC. |
Keep in mind that the Tennessee annual report fee, the $100 minimum franchise tax, the 6.5% excise tax, payroll setup costs, and ongoing CPA fees together typically add roughly $1,000 to $3,000 or more in annual costs. S Corps also have ownership restrictions that may not suit every business model.
| Requirement | Details |
|---|---|
| Form 1120-S (Federal) | Due March 15. Reports S Corp income at the federal level. Distribute K-1s to shareholders. |
| Form FAE 170 (Tennessee Franchise and Excise Tax) | Due April 15. Pays 6.5% excise tax on net earnings and 0.25% franchise tax on net worth, with a $100 minimum franchise tax.[2] [11] |
| Tennessee Annual Report | Filed with the Secretary of State by the first day of the 4th month after fiscal year end. $20 for corporations; $50 per member for LLCs.[4] |
| Form 941 (Federal Payroll Tax) | Filed quarterly. Reports federal income tax, Social Security, and Medicare withheld. |
| Tennessee Unemployment Insurance | Quarterly premium and wage reports filed with the Tennessee Department of Labor and Workforce Development once your business is liable.[9] |
| W-2s and 1099s | Distributed by January 31. Filed with the IRS and the Social Security Administration. |
| Estimated Tax Payments | Quarterly federal estimated tax, plus quarterly Tennessee franchise and excise tax if combined liability is $5,000 or more in both the prior and current years.[2] |
| Registered Agent Maintenance | Maintain a registered agent with a physical Tennessee address at all times.[13] |
| Sales and Use Tax Returns | Filed with the Department of Revenue if the business sells taxable goods or services. The state rate is 7% plus local tax.[7] |
[1] Tennessee Department of Revenue. Franchise & Excise Tax Overview (franchise tax on net worth, $100 minimum; excise tax on net earnings). Accessed May 20, 2026.
[2] Tennessee Department of Revenue. Franchise & Excise Tax Due Dates and Tax Rates (0.25% franchise, 6.5% excise). Accessed May 20, 2026.
[3] IRS. Instructions for Form 2553. Accessed May 20, 2026.
[4] Tennessee Secretary of State. Business Forms & Fees (Charter For-Profit Corporation $100; Articles of Organization LLC $300 minimum). Accessed May 20, 2026.
[5] IRS. Where to File Your Taxes for Form 2553 (Tennessee: Kansas City, MO 64999). Accessed May 20, 2026.
[6] Tennessee Department of Revenue. Franchise & Excise Tax Registration. Accessed May 20, 2026.
[7] Tennessee Department of Revenue. Sales and Use Tax (7% general state rate). Accessed May 20, 2026.
[8] Tennessee Department of Revenue. Hall Income Tax (repealed for tax years beginning January 1, 2021). Accessed May 20, 2026.
[9] Tennessee Department of Labor and Workforce Development. Unemployment Insurance Tax for Employers. Accessed May 20, 2026.
[10] IRS. S Corporations. Accessed May 20, 2026.
[11] Tennessee Department of Revenue. Franchise & Excise Tax Forms (Form FAE 170). Accessed May 20, 2026.
[12] Tennessee Department of Revenue. Schedule G Refunds (2024 Public Chapter 950 franchise tax change). Accessed May 20, 2026.
[13] Tennessee Code. Tennessee Code Annotated, Title 48 (Business Organizations, registered agent requirements). Accessed May 20, 2026.
[14] Tennessee Secretary of State. Business Services (entity formation and filings). Accessed May 20, 2026.
[15] Tennessee Department of Revenue. Franchise & Excise Tax Exemptions and Credits. Accessed May 20, 2026.Exemptions and Credits
