Filing S Corp Taxes: Everything You Need to Know
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.4 min read
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.
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.
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.
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.
If you need help with filing S corporation taxes, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.