S-Corp status saves Denver business owners thousands in taxes, but it also puts a target on your back for IRS scrutiny. Certain mistakes practically invite an audit. After helping hundreds of Denver businesses with tax reduction planning, we've seen which S-Corp errors get flagged most often.
Here are the five biggest mistakes that trigger IRS attention and how to avoid them.
This is the number one S-Corp audit trigger. The IRS knows that some business owners try to pay themselves tiny salaries and take huge distributions to avoid employment taxes. They actively look for this pattern.
According to IRS guidelines on S-Corp compensation, shareholder-employees must receive reasonable compensation for services performed. Pay yourself $25,000 in salary while taking $200,000 in distributions, and you're asking for trouble.
The IRS has won numerous court cases on this issue. In David E. Watson P.C. v. United States, the court sided with the IRS and reclassified distributions as wages, hitting the taxpayer with employment taxes, penalties, and interest.
How to avoid this: Base your salary on market rates for your position in your industry in the Denver area. Use salary surveys from sites like Salary.com or Bureau of Labor Statistics. Document your research. Aim for your salary to be at least 40-50% of your total S-Corp profit if you're actively running the business. Our Denver business CPA team helps clients research and document appropriate salary levels.
Some Denver S-Corp owners think they can skip salary entirely if they don't need the cash. Wrong. The IRS is explicit: officers and shareholders who perform services must receive wages.
Taking zero salary while pulling distributions is a massive red flag. It tells the IRS you're trying to avoid all employment taxes. Even in a bad year, if you worked in the business, you need some salary.
How to avoid this: Always pay yourself at least some salary if you performed services for the S-Corp. Even if the business had a loss, document the hours you worked and pay yourself something. If you literally did no work (maybe you hired a CEO to run everything), document that in corporate minutes. Otherwise, pay yourself.
S-Corps must withhold employment taxes from shareholder wages and deposit them with the IRS on schedule. Most businesses deposit monthly or semi-weekly, depending on their size. Miss these deposits and the IRS notices immediately.
Payroll tax problems are taken seriously. The IRS can assess a Trust Fund Recovery Penalty that makes individual officers personally liable for unpaid payroll taxes, even if the business has liability protection. This penalty bypasses your corporate protection.
How to avoid this: Set up automatic payroll with a professional payroll service. Don't try to run S-Corp payroll manually unless you really know what you're doing. Our Denver bookkeeping services include payroll setup and processing to ensure timely deposits. The cost of a payroll service (typically $1,200 to $2,400 annually) is cheap insurance against payroll tax penalties.
S-Corps must file Form 1120-S by March 15 each year (or September 15 with an extension). Many Denver S-Corp owners don't realize this is separate from their personal tax return. Miss the deadline and you face penalties of $210 per month per shareholder (for 2025).
If your S-Corp has three shareholders and you file four months late, that's $2,520 in penalties ($210 × 3 shareholders × 4 months). File a full year late and you're looking at over $7,500 in penalties for a three-shareholder S-Corp.
Even worse, file late multiple years in a row and the IRS can revoke your S-Corp election entirely, forcing you back to C-Corp status with double taxation.
How to avoid this: Mark March 15 on your calendar every year. Better yet, file an automatic extension by March 15 to give yourself until September 15. Make sure your tax return preparation includes both your personal return and your S-Corp return. Don't assume your accountant will handle the S-Corp return if you only sent them personal tax documents.
The IRS and courts expect S-Corps to maintain proper corporate formalities. That means holding annual shareholder meetings, documenting major decisions in corporate minutes, keeping separate business bank accounts, and maintaining corporate records.
Commingling personal and business funds is a major problem. Using your S-Corp bank account for personal expenses or depositing personal income into the business account erodes your corporate protection and raises red flags with the IRS.
How to avoid this: Keep separate bank accounts and credit cards for your S-Corp. Never mix personal and business expenses. Hold at least an annual shareholder meeting (even if you're the only shareholder) and document decisions in minutes. Keep corporate records organized and separate from personal files. These formalities take minimal time but provide critical protection if you're ever audited.
Some Denver S-Corp owners take distributions before paying themselves adequate salary for the year. The IRS views this as an attempt to avoid employment taxes. You can't pay yourself $10,000 in salary in December after taking $150,000 in distributions throughout the year.
The IRS expects you to pay reasonable wages throughout the year before taking distributions. Payroll should be regular and consistent, not an afterthought.
How to avoid this: Set up biweekly or monthly payroll from the start of the year. Pay yourself consistent wages throughout the year. Take distributions after you've met your reasonable salary requirement. Document distribution decisions in corporate minutes.
We covered this in detail in our S-Corp health insurance article, but it's worth repeating: health insurance premiums for more-than-2% S-Corp shareholders must be included in W-2 Box 1 wages.
Many Denver S-Corp owners pay health insurance premiums and deduct them on their tax return without including them in W-2 wages. The IRS disallows these deductions in audits.
How to avoid this: Coordinate with your payroll provider to ensure health insurance premiums are included in W-2 Box 1 (but not Boxes 3 and 5). If you're paying premiums personally, have your S-Corp reimburse you and include the reimbursement in wages. Document the arrangement in corporate minutes.
S-Corp income flows through to your personal return, but there's no withholding on distributions. You're responsible for making quarterly estimated tax payments to cover income taxes on your S-Corp profit.
Many Denver business owners forget about estimated taxes until they file their return and face a huge balance due plus underpayment penalties. The IRS charges penalties if you don't pay at least 90% of your current year tax or 100% of your prior year tax through withholding and estimates.
How to avoid this: Calculate your quarterly estimated taxes based on your S-Corp profit. Make payments by April 15, June 15, September 15, and January 15. If your income varies significantly, consider using the annualized income method to reduce penalties. Our tax strategy services include quarterly estimated tax calculations for Denver S-Corp owners.
To be treated as an S-Corp for 2026, you must file Form 2553 by March 15, 2026 (or within 2 months and 15 days of forming your entity). Miss this deadline and you're stuck waiting until 2027, costing you a full year of tax savings.
The IRS offers late election relief in some cases, but it requires additional paperwork and you must have "reasonable cause" for missing the deadline.
How to avoid this: File Form 2553 immediately after forming your business if you want S-Corp status. Don't wait. The form is simple and can be filed online. If you miss the deadline, talk to a CPA about late election relief options.
S-Corp shareholders can only deduct losses up to their basis (investment) in the corporation. If you contributed $10,000 to form your S-Corp and it had a $50,000 loss, you can only deduct $10,000 of that loss. The remaining $40,000 carries forward to future years.
Many Denver S-Corp owners deduct the full loss without checking their basis, which triggers IRS notices and disallowed deductions.
How to avoid this: Track your S-Corp basis annually. Your basis increases with additional capital contributions and your share of S-Corp income. It decreases with distributions and losses. Keep a running basis schedule with your tax planning documents. If you're not sure how to calculate basis, ask your CPA.
Certain patterns increase your audit risk as an S-Corp: salary below $30,000 with distributions above $100,000, zero salary with any distributions, large losses claimed on your personal return from your S-Corp, distributions taken when the S-Corp has no retained earnings, inconsistent salary year to year without explanation, or failing to file Form 1120-S multiple years.
If any of these apply to your Denver S-Corp, fix them immediately. It's much easier to correct mistakes voluntarily than to deal with an IRS audit.
If you realize you've been making S-Corp mistakes, don't panic. Many errors can be corrected. File amended returns if needed to report income correctly. Make correcting payroll adjustments if you underpaid salary. File delinquent Forms 1120-S with penalty explanations. Consult with a CPA about the best approach to fix past errors.
The IRS is often more lenient if you proactively correct mistakes before they discover them in an audit. Our Denver CPA team helps clients clean up S-Corp errors and get into compliance without triggering unnecessary audits.
At Succentrix, we help Denver S-Corp owners avoid these costly mistakes from the start. We set up proper payroll systems, calculate appropriate salary levels, ensure timely filing of all required forms, coordinate health insurance deductions correctly, and maintain corporate formalities and documentation. Most importantly, we help clients sleep well knowing their S-Corp is structured correctly and won't trigger IRS problems.
If you're worried your Denver S-Corp might have compliance issues, schedule a consultation with our team. We'll review your current setup, identify potential problems, and fix any issues before they become audit triggers. Prevention is always cheaper than dealing with IRS problems after the fact.
