Understanding how to file S corp taxes ensures you stay legally compliant. You'll have certain tax forms to submit as well as deadlines to adhere to. Being organized will help you make sure not to miss any due dates and suffer penalties as a result.

About S Corp Taxes and How to File Them

S corps offer several tax advantages. As with LLCs, S corps provide protection for an owner's personal assets in the event a lawsuit is filed against the company.

S corps must file an income tax return annually. They also must submit a range of other tax forms, including those that relate to employee withholdings. Taxes for S corps can be tricky, particularly for company shareholders who also earn a salary from the business.

Each quarter, S corps are required to pay estimated taxes. If an S corp fails to pay estimated taxes on time, they may have to pay penalties and be subject to interest. It's worth paying for tax advice from a professional before opting for a certain tax status or preparing business taxes.

At a minimum, you must file Forms 1120S and Schedule K-1 for your S corp. If there are any company shareholders who also earn a salary, you're responsible for payroll taxes.

Payroll taxes include the following:

  • Unemployment tax 
  • Federal tax withheld from employee checks 
  • FICA tax

You'll report payroll taxes on Forms 940 and 941. You won't mail out Schedule K-1s until Form 1120S is complete.

Tax Filing Forms and Due Dates

Following are typical forms you'll deal with and what they're used for:

  • Form 1120S: This reports all business losses, credits, income, and deductions.
  • Schedule K-1: This is for shareholders to report their share of net earnings on their individual tax returns. It reports all the pass-through income, credits, losses, and deductions of the S corp.
  • Form 940: Employers are required to file this every year to report payments made for unemployment taxes.
  • Form 941: Employers must file this quarterly to report FICA taxes and income tax withheld from employee paychecks.

As with other corporations, the deadline for S corp tax returns is March 15. If you can't submit your return by the deadline, submit Form 7004 for a six-month extension. You must submit the form by March 15 in order to qualify for an extension.

If you're paid a salary by your S corp, your income tax filing deadline is April 15, which is the typical filing deadline.

Late Filing Penalties

If an S corp fails to file by deadline or the extended deadline, the IRS will penalize the company. The minimum penalty is $195, which will be assessed for every month or just a portion of the month beyond the due date, multiplied by your company's number of shareholders.

If an S corp is late in filing Form 941 and it owes a tax balance, the IRS will assess a 5 percent penalty for each month or partial month. This penalty stops at a max of 25 percent. If the company is late in filing Form 940, it's subject to similar penalties.

Tax Advantages of an S Corp

Most individuals thinking of electing S corp status are LLC business owners who are currently taxed as partnerships or sole proprietorships.

One of the advantages of S corp election is not having to pay self-employment taxes on the business's net earnings. Instead, S corp owners can be treated as employees and earn a salary. They'll then share Medicare and Social Security taxes with the business.

S-corps avoid the double taxation issue that C corps are subject to. Because C corps are considered taxable entities, the corporation is taxed and any dividends distributed to the owners are also taxed.

Another advantage is the possible reduction in an owner's tax bill due to operating losses. Your tax rates will be based on individual rates, which may be lower than corporate rates.

There are several forms you'll have to file once a year or quarterly, but some business owners find the tax advantages worth the extra amount of hassle. It's always wise to choose a business type that's best suited to your company overall, however, and not simply due to tax considerations. You might want to consult with a tax attorney or other tax professional to ensure you're making the right business decision.

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