What Tax Return Does an S Corp File

Key Takeaways

• S corporations file Form 1120S annually with the IRS, reporting income, deductions, and credits but not paying federal income tax at the corporate level.
• Each shareholder receives a Schedule K-1, detailing their share of profits and losses to report on their individual tax return (Form 1040).
• S corps must also file Form 941 (quarterly payroll taxes), Form 940 (FUTA tax), and any state-specific income, franchise, or excise taxes.
• Deadlines include March 15 for Form 1120S and April 15 for individual returns. Extensions are available using Form 7004.
• States may impose additional filing requirements such as information returns or minimum franchise fees.
• S corp owners can reduce taxable income by properly designating reasonable salaries, distributions, and business deductions.

Filing S corp taxes involves sending an Information return to the IRS using Form 1120S. In addition, S corporations that have employees must withhold and file payroll taxes and might need to file federal unemployment taxes. S corporations also pay state taxes and, depending on the state where it does business, an S corporation might need file state franchise tax and state sales tax. S corporation shareholders also pay marginal federal and state personal income taxes.

The S Corporation and Taxes

Unlike C corporations, S corporations do not pay federal corporate tax. This is because S corporations have been given flow-through status by the IRS. The corporation's profits and losses flow through to the owners. It is the owners who must pay income tax on their share of the corporation's income.

Each S corporation, however, files an information return with the IRS annually. The corporation must also withhold and forward payroll taxes from all its employees.

How S Corp Income Is Reported to the IRS

While an S corporation itself doesn’t pay federal income tax, it must report all financial activity each year using Form 1120S, also called the U.S. Income Tax Return for an S Corporation. This informational return details the company’s gross receipts, deductions, and credits. Each shareholder then receives a Schedule K-1, which outlines their portion of the S corp’s income, losses, and deductions.

Each shareholder must include the K-1 information on their individual tax return (Form 1040). This “pass-through” structure ensures profits are taxed once—at the shareholder level—rather than at both corporate and individual levels as in a C corporation.

Shareholders also need to account for distributions and reasonable compensation:

• Reasonable salary: Must be paid to shareholder-employees for services rendered, subject to payroll taxes.
• Distributions: Amounts beyond salary may be exempt from self-employment tax if structured correctly.
  Accurate reporting of both helps the IRS distinguish between earned income and return on investment.

Taxes That S Corporations File to the IRS

• Form 1120S
  This tax form is to inform the IRS about the activity, income, and loss of S corporations. It is the equivalent of Form 1120 for C corps. The difference is that S corporations do not actually pay the corporate tax. In addition to this form, every S corporation must attach a Schedule K-1 for every shareholder. The K-1 shows each shareholder's share of the corporation's income or loss.
  Form 1120S must be filed by March 15, but S corporations can get a six-month extension by filing Form 7004. In case the S corporation fails to file in time, the IRS can impose a penalty of $195 multiplied by the total number of shareholders for each month an S corporation has failed to file.
• Personal Income Tax of S Corp Shareholders
  S corporation shareholders must file their share of the S corporation's income or losses using IRS Form 1040, Schedule K-1. Taxes vary with the shareholder earnings, but they range from 10 to 37 percent of the income. Personal income returns are due on April 15.
• Medicare and Social Security Taxes
  The IRS requires all S corporation employees and employee shareholders to pay payroll taxes. Medicare and Social Security taxes are filed each quarter using IRS Form 941.
  Payroll taxes are due every quarter. The S corporation withholds about 7.65 percent of each employee's wages and then adds an equal amount to pay Medicare and Social Security taxes.
  Late filing or payment may attract a penalty of about 5 to 25 percent of the amount owed each month.
• Federal Unemployment Tax Act (FUTA) Tax
  Some S corporations must file the Federal Unemployment Tax Return using Form 940. To qualify to file Form 940, the S corporation must be paying wages of at least $1,500 per quarter or have one or more employees who work for at least part of a day in at least 20 different weeks. For S corporations that employ farm workers, if they pay at least $20,000 to farm workers in any quarter or employ 10 or more farm workers for 20 or more weeks, they qualify for FUTA tax. The tax is charged at a rate of about 6 percent of the wages, though employers can pay less if they contribute to state-level unemployment funds.
  Form 940 is due quarterly but can be filed once on January 31. There is a 5 to 25 percent penalty for filing or paying late.

Filing Deadlines, Extensions, and Penalties

S corporations must file Form 1120S by March 15 for the previous tax year (or the next business day if March 15 falls on a weekend or holiday). If more time is needed, the corporation can request a six-month extension by submitting Form 7004.

Shareholders’ personal returns (Form 1040 with Schedule K-1) are due by April 15. Missing these deadlines can result in penalties of $220 per shareholder per month, up to 12 months, according to IRS guidelines.

To avoid late filing penalties:

• Mark calendar reminders for both corporate and individual due dates.
• File electronically to confirm timely receipt.
• Pay estimated taxes quarterly if large income is expected from the S corp.

S Corporation Taxes Due to State Governments

The number and type of state taxes an S corporation must give to the state depend on the state where the corporation does business and its line of business. Corporations generally need to open a tax withholding account and file using the appropriate tax forms. You can get details about these taxes and forms with the state's Department of Revenue.

• State Corporate Income Tax
  Corporate tax is essentially a tax on a corporation's profits or income. Although the federal government does not levy this tax on S corporations, some state governments do. The rates vary by state.
• State Information Returns
  Most states require S corporations to file Information returns similar to the ones they file to the IRS using Form 1120S. There are normally filing fees for filing this return. 

Other state taxes that S corporations might be required to pay are franchise tax, sales tax, and excise tax. Consult a tax attorney in your state to make sure you don't overlook any taxes for your state.

State Filing Requirements and Additional S Corp Taxes

Each state determines its own S corporation tax obligations. While most recognize federal S corp status, some levy state income or franchise taxes even on pass-through entities.

Common state-level filings include:

• State Information Returns: Modeled on Form 1120S, detailing state-specific income and deductions.
• Franchise or Privilege Taxes: Charged for the privilege of operating within the state, such as California’s 1.5% franchise tax or Tennessee’s excise tax.
• Sales and Use Taxes: If the S corp sells taxable goods or services.
• Employment Taxes: State unemployment insurance contributions for employees.

S corps doing business in multiple states may have to file nonresident shareholder returns and pay apportionment-based income taxes depending on where revenue is earned. Keeping accurate records of in-state and out-of-state income helps prevent overpayment or double taxation.

Reducing S Corporation Tax Liability

Even though S corporations benefit from pass-through taxation, there are several strategies to minimize overall tax liability:

1. Pay Reasonable Salaries: Overpaying wages increases payroll taxes; underpaying may trigger IRS scrutiny. Balance salary and distributions carefully.
2. Maximize Business Deductions: Deduct allowable expenses such as health insurance premiums for shareholder-employees, office rent, travel, and depreciation.
3. Contribute to Retirement Plans: Contributions to SEP IRAs or Solo 401(k)s reduce taxable income for both the corporation and its shareholders.
4. Use the Qualified Business Income (QBI) Deduction: Many S corp shareholders can deduct up to 20% of qualified business income under IRS Section 199A.
5. Track Basis and Distributions: Shareholders must maintain a stock and debt basis worksheet to determine allowable loss deductions and avoid excess distributions being taxed as capital gains.

Frequently Asked Questions

1. What tax return does an S corp file with the IRS?
   An S corporation files Form 1120S, an informational return that reports the company’s income, deductions, and credits. It also provides each shareholder a Schedule K-1 for use on their personal tax return.
2. When is the S corp tax return due?
   Form 1120S is due March 15 for calendar-year corporations. If needed, file Form 7004 for a six-month extension.
3. Do S corp shareholders pay self-employment taxes?
   Shareholder-employees pay payroll taxes on their reasonable salary but not on distributions, which are exempt from self-employment tax if properly categorized.
4. Does an S corporation pay state income tax?
   In most states, S corps don’t pay corporate income tax but may owe franchise or excise taxes. Check with the state’s Department of Revenue for specifics.
5. Can an S corporation deduct health insurance premiums?
   Yes. If the S corp pays health insurance premiums for a shareholder owning more than 2% of the company, those premiums are deductible by the corporation and must be reported as wages on the shareholder’s Form W-2.

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