S Corp Filing: Everything You Need to Know
S corp filing is a process that entails filling out Form 2553 to turn your C corp into an S classification.3 min read
2. Form 940
3. Penalty Tiers
4. Corporate Differences
5. S Corp Limitations
S corp filing is a process that entails filling out Form 2553 to turn your C corp into an S classification. S corps were created to eliminate double taxation associated with corporate entities while giving additional support to small business owners. As your company expands, tax rates will grow as well, which is why an S corp classification is a prime choice among small business owners. Expanding companies contend with a variety of intricacies during tax season, and this is where S corp classification can help your business.
An s corp is an entity that provides certain tax advantages and still preserves the same rights as a standard corporation. An S corp must file an information-based tax return annually, including a variety of other IRS documents. Most notably, S corps offer what’s called pass-through taxation, where losses and profits flow from the business to shareholders to file on their tax returns.
An S corp should file annual tax returns by March 15 each year. In addition, the business needs to report financial activities on Form 1120S and include a Schedule K-1 for every shareholder. A Schedule K-1s notes a shareholder’s portion of taxable income within the business so they may file it on their personal tax returns.
If an S corp cannot file it on March 15, owners can apply for a six-month extension by using Form 7004, which should be sent to the IRS. All shareholders who pay taxes on business income must adhere to the individual taxpayer deadline of April 15 annually.
If an S corp pays a wage to employees, the business must withhold federal income taxes, including Medicare and Social Security taxes on behalf of workers. Withholding taxes requires Form 941 every quarter to detail an aggregate amount that the business withholds. Form 941 is due four times annually on the following dates:
- January 31
- April 30
- July 31
- October 31
Hiring employees may also necessitate a yearly Federal Unemployment Tax return on Form 940 as well. For instance, if a business gives wages of $1,500 or greater during a calendar quarter, or has at least one employee working at least part of the day during 20 or more separate weeks, that S corp should still File 940.
The goal of the form is to note the wage amount that an S corp owes in unemployment taxes. With that, if a corporation pays all of the taxes on time, the IRS will allow later filing times. For instance, if a business pays all taxes owed, the deadline would be February 10 instead of the first deadline of January 31.
When an S corp fails to file 1120S by the deadlines, the IRS will at first levy a penalty of $195 for every month, or part of the month that the return is late, multiplied by shareholder numbers within the S corp. If a corporation files Form 941 after the deadline and has an unsatisfied tax obligation, a 5 percent penalty will be added to the balance for each month, or part of the month that the tax is late, and the maximum penalty is 25 percent.
Unlike standard C corp, an S corp does not pay income taxes. Rather, the S corp gets special tax designations that are more favorable to business owners. In addition, an S corp comes with special benefits:
- Ownership Transfer: S corps allow owners to transfer stock without penalties or dissolution. This is not the case with LLCs, as owners would need permission from other owners before a transfer could take place.
- Reducing Tax Liabilities: S corps allow members to lower self-employment tax obligations. Further, owners can take an employee salary and reduce tax balances by lowering the business profit amounts open to self-employment taxation.
Before embarking on the aforementioned strategies, talk to a tax professional to find out if such options would be available to your business.
S Corp Limitations
Although S corps provide a number of benefits, you should be aware of the disadvantages:
- S corp can have no more than 100 shareholders.
- It must be registered as a domestic entity.
- Shareholders must be U.S. citizens or legal residents.
- Only one stock class is allowed (no tiered stock benefits permitted).
If you want multiple stock classes, or wish to take your company public, a C classification would be a better choice for your business endeavors.
To find out more about S corp filing, post your legal need to our UpCounsel marketplace. UpCounsel’s attorneys will guide you through the S corp filing process and will be at your side as your grow your business. In addition, they can provide assistance as you file taxes and ensure that you file the right documentation.