S Corp Late Filing Penalty: Everything You Need to Know
The S corp late filing penalty applies to tax returns of various types that are not filed in a timely manner.3 min read
2. Why Choose the S Corp?
3. Special Considerations for S Corps
4. Tax Requirements for an S Corp
Updated November 23, 2020:
The S corp late filing penalty applies to tax returns of various types that are not filed promptly.
Who Chooses the S Corp?
An S corp is a business structure that only privately held companies may choose. It is a popular choice. According to data from the U.S. Small Business Administration, about 44 percent of companies with fewer than 500 employees, generally considered to be small organizations, function as an S corp. Only 22 percent of the companies this size run as a C corp, by comparison.
Why Choose the S Corp?
Federal tax benefits spur many companies to choose the S corp structure. An S corp can:
- Keep the limited liability provisions that a corporation enjoys
- Pass corporate incomes, losses, etc. to shareholders for tax purposes
Even with tax benefits, changing corporate structure is something to consider carefully and thoroughly because not every business is eligible. Also, only domestic corporations can elect to change from another structure into an S corp. Before deciding to move to an S corp structure, a company should consult with tax and legal counsel to avoid costly mistakes.
To function as an S corp, the company must meet certain conditions.
- It must have no more than 100 allowable shareholders who:
- Are individuals or some types of trusts or estates
- Are not partnerships, corporations, or non-resident aliens
- The company may only offer one class of stock.
- Certain types of companies, like financial institutions and insurance companies, are not eligible to operate as an S corp.
- Shareholders must sign Form 2553, Election by a Small Business Corporation, to indicate their agreement with the decision to operate as an S corp.
Special Considerations for S Corps
The IRS watches S corps carefully for potential violations of employment tax law. The company must be very careful not to underpay shareholders who also work for the company. If it looks like a shareholder's compensation is out of line with the market, the IRS can classify part of the earnings as unpaid wages and force the company to pay Medicare and Social Security taxes on them. Salaries overall must be monitored closely. Low salaries combined with high distributions could draw attention from IRS auditors.
Tax Requirements for an S Corp
The S corp has some specific tax filing deadlines.
- Each quarter, the S corp must file IRS Form 941 to report total withholding. Those funds must be submitted to the IRS four times per year at the end of January, April, July, and October. Late returns are penalized at 5 percent of the unpaid tax for every month or a partial month late.
- The annual tax return is due by the 15th day of the third month after the end of the tax year (usually March 15). For a six-month extension, the corporation can file IRS Form 7004. If the return is late, penalties accrue from the first day at 5 percent of the unpaid tax for every month or portion of a month late. The maximum penalty is 25 percent of the unpaid tax. Even if there was no tax due on the return, the penalties are still $195 per month for any portion of a month when the return is late times the number of shareholders.
- All financial activity is reported on Form 1120S with an attached Schedule K-1 for each shareholder.
- The K-1 must include the shareholder's share of the taxable income, and the shareholder must report it on his or her personal return. That individual return is due on April 15, just like other taxpayers. By passing the corporate income through to the personal return, shareholders can avoid double taxation.
- The IRS Form 940 is due by January 31 of each year to report the wages that the S corp pays employment taxes on. Those taxes include withholding as well as Medicare and Social Security. Late returns are subject to a 5 percent penalty for each month late. If all the taxes are paid on time, the IRS may extend the deadline for the return to February 10. The company must file an annual Federal Unemployment Tax Return on Form 940 if:
- It pays wages of $1,500 or more in any quarter OR
- It has at least one employee working at least part of a day in 20 or more weeks
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