S Corp Tax Filing: Everything You Need to Know
S corp tax filing mainly involves filing Form 1120S with the IRS and sending Schedule K-1 to all shareholders.3 min read
2. Advantages of S Corp Taxes
3. Disadvantages of S Corp Taxes
4. When It Makes Sense to Become an S Corp
5. Qualifications to Be an S Corp
6. Self-Employment Tax Requirements
7. Required S Corp Tax Returns
8. Steps to File S Corporation Tax Returns
S corp tax filing mainly involves filing Form 1120S with the IRS and sending Schedule K-1 to all shareholders.
What Is an S Corp?
An S corporation is a company that chooses to distribute its earnings and losses among its shareholders.
Advantages of S Corp Taxes
- S corp owners need not pay self-employment taxes; they can draw salaries from their companies and share the Social Security costs and FICA taxes with the company.
- Unlike C corps, S corporations are not subject to double taxation.
- Since a C corporation is a distinct legal entity, it's liable to pay taxes on its net income, and when the income is distributed among shareholders via dividends, the shareholders again have to pay taxes on their shares of income.
- Salary and other company operating expenses bring down the amount of taxes for individual owners. Additionally, tax rates for individuals are usually lower than those for corporations.
Disadvantages of S Corp Taxes
- An S corp is subject to unemployment and FICA taxes in respect to the wages paid to its shareholders.
- Failure to file papers on time can take away the S corp status.
When It Makes Sense to Become an S Corp
- Going for an S corp is most beneficial when you are starting a new business. The expenses and losses will be higher in the initial years. You can offset your share of the losses against your personal income and substantially reduce your tax liability.
- If your tax bracket is lower than corporate tax rates, you can save on taxes by choosing an S corp status.
Qualifications to Be an S Corp
In order to gain the S corp status, a company must satisfy all these conditions:
- It should be a domestic company
- Except for some trusts and estates, it can only have individual shareholders
- None of the shareholders should be nonresident aliens
- The number of shareholders should not exceed 100
- It should not offer more than one class of stock
- It should not fall under the category of ineligible corporations
To apply for an S Corporation:
- Fill out Form 2553 and have it signed by all the existing shareholders,
- File Form 2553 with the IRS. This must be done within two months and 15 days from the beginning of the tax year in which the S Corp status is to come into effect.
Self-Employment Tax Requirements
- When the S corp shareholders receive their shares in the earnings of the company, self-employment taxes do not apply. However, FICA tax is deducted from the salary paid to the shareholders.
- An S Corp is liable to pay the employer's share of FICA tax.
Required S Corp Tax Returns
- An S corporation must file Form 1120S with the IRS and provide Schedule K-1 to its shareholders. If it pays salary to its shareholders, it must also pay payroll taxes.
- It should file forms 940 and 941 for the payroll taxes.
- Form 1120S contains details of income, losses, deductions, and credits.
- Schedule K-1 contains details of the shareholders' shares in the net earnings of the company.
- Form 940 must be filed annually; it contains the details of unemployment tax payments.
- Form 941 must be filed quarterly; it contains details of income and FICA taxes deducted from employees' salaries and the company's contribution to FICA taxes.
Steps to File S Corporation Tax Returns
- S corporations must file their tax returns on or before March 15, rather than the April 15 deadline for individuals.
- An S corporation should maintain its books of account throughout the year to ensure the expedient filing of returns. It must also include its owners (shareholders) in the tax-filing process.
- The company must file a quarterly return in Form 941 and an annual return in Form 940 to report payroll taxes.
- You can download Form 1120S from the IRS website to file annual tax returns with federal and state governments.
- If you can't file your tax return by March 15, you should submit Form 7004 before this deadline (March 15), requesting for an extension of six months to file the return.
- The responsibility for paying income taxes is on the shareholders, not the S corporation.
- After filing Form 1120S, an S corporation must send out Schedule K-1 to its shareholders, and this must be done before March 15.
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