Massachusetts S corporation tax returns are filed by the owners who pay personal income taxes on the corporation's profits. S corporations are "pass-through" entities and are not required to pay corporate income tax. The income is passed through to the owners.

About Massachusetts and S Corporations

S corporations, also referred to as S Corps, and limited liability companies (LLCs) are two business structures often considered when forming a business in Massachusetts because each offers liability protection. With these two structures, the owner's liability is restricted to the amount invested in the company.

Prior to forming a Massachusetts S corporation, a C corporation must be formed. To form a C corporation, you must choose a business name that is distinguished from other businesses and file either a Certificate of Organization or Articles of Organization with the Secretary of the Commonwealth of Massachusetts.

Once the C corporation has been formed, you can file an Internal Revenue Service Election by a Small Business Corporation Form 2553 to elect to have your C corporation treated as an S corporation.

Management

An S corporation has a more rigid structure. For example:

  • An S corporation must elect at least one director and one officer.
  • Bylaws for the S corporation must be created.
  • Board meetings must be held.
  • Recorded minutes must be taken.
  • An S corporation is limited to 100 shareholders.

Taxes

As mentioned, S corporations are subject to pass-through taxation, unlike a limited liability company. When treated as a corporation, the profits are taxed once at the corporate level and then again at the member level. Only when an LLC is treated as a partnership is it subject to pass-through taxation.

When the business entity distributes the profit earnings to each of the shareholders or members, it then becomes the responsibility of the shareholders and members to pay taxes on the shares they hold in the company. In Massachusetts, an S corporation must pay a minimum excise tax annually.

A regular C corporation is subject to state and federal corporate income tax, which can run around 35 percent at the federal level and 8 percent in Massachusetts. Investors will also pay capital gains or dividend taxes on profits. When profits are distributed for pass-through entities, owners do not pay a separate dividend tax. An S corporation pays only on the profits.

Here are two examples.

1. An S corporation has a gross revenue figure of $10 million and $9.5 million was spent on expenses. The amount of the profits the S corporation's taxes will be based on and the amount owners will be responsible for paying is $500,000.

2. If the S corporation hires more employees during the year and spends the $500,000 on salaries, the profit figure would be depleted. The S corporation would have zero profits, so there would be no tax owed.

In states with taxpayers that have relatively high incomes, the taxpayers are subject to higher rates. In the case of S corporation owners with a high income as well as other pass-through businesses, the owners will pay the higher rate on income taxes paid on their pass-through income. Like California, which has a 1.5 percent additional S corporation tax, Massachusetts also charges S corporations an additional tax.

The states that currently have those higher tax rates directed at those with very high income have not found it necessary to help S corporations by creating special tax breaks.

Self-Employment Taxes

Shareholders in an S corporation receive a paid salary and their wages are reported on a W-2. Medicare and Social Security taxes are withheld. An LLC, on the other hand, considers members of an LLC to be self-employed. This makes them subject to self-employment taxes, which includes Social Security and Medicare.

Restrictions

An S corporation is only allowed to be a domestic corporation. It must not exceed 100 shareholders and not have no more than one class of stock. There are certain corporations that may not form as an S corporation, such as domestic international sales corporations and insurance companies. On July 3, 2008, Massachusetts enacted a law focused on making the corporate tax structure easier and increasing the revenue while reducing the corporate tax rate.

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