S Corp Tax Form: Everything You Need to Know
The conversion to an S corporporation is an elective designation filed with the IRS. It changes how the corporation is taxed. 3 min read
An S corp tax form is essentially IRS Form 1120S . Two types of corporations are recognized in the US — C corporations, normally just called corporations, and S corporations, named for the section of the IRS code they relate to. Both corporation types use the same basic structure, including the use of Articles of Incorporation. They also have a board of directors and prepare bylaws.
Overview of S Corporation Designation
The conversion to an S corporporation is an elective designation filed with the IRS. It changes how the corporation is taxed. S corporations are pass-through entities, which means that individual shareholders pay the tax on the business's profits versus the corporation itself. The IRS still recognizes S corporations as separate entities, and they are required to file tax returns, which are primarily informational in nature.
S corps start out as C corps, then all shareholders must form a unanimous decision to become an S corporation. In order to qualify as an S corporation, the company needs to meet certain criteria:
- There cannot be more than 100 shareholders
- Shareholders can only be individual people, some types of trusts, or tax-exempt organization (no non-resident aliens, partnerships, or corporations
- There can only be one class of stock
S Corporation Taxes: IRS Tax Form 1120S
S corporations will file Federal Form 1120S whereas regular corporations file Form 1120. The majority of the information on this form deals with income, deductions, and payments, including estimated tax payments. You also need to file Schedule B on Form 1120S, which includes a variety of information:
- Other ownership interests in partnerships or stock in other corporations
- Whether the corporation's assets and total receipts at year end were under a certain total
S corps must also file a summary of information that includes income, deductions, credits, and any other things that are passed on to shareholders. This is done via a Schedule K. At the end of the company's tax year, the S corporation must prepare a Schedule K-1 and give a copy to each of its shareholders. K-1 items are then added to shareholders' personal tax returns. This form is used to report a variety of information, including dividend receipts, income, losses, and capital gains.
S corporations must report payroll taxes throughout the year. One report is required each quarter and another is required once a year. If you have employees, you must also withhold employment taxes from their checks. Shareholders who provide some type of service to the company must be paid a salary.
Watch for Potential State Taxes
Depending on what state you're in, you may be taxed at the state level for S corporation profits. Check your local state tax authority or state department of revenue to determine what the local state laws are where you are. S corporations are taxed at a flat rate in some states.
Filling Out and Filing IRS Form 1120S
There are several basic steps you need to follow to file the Form 1120S:
- Get all the necessary information ahead of time.
- Fill out the general information section that talks about your business information.
- Next section is the income and expenses where you'll calculate your business's income and losses.
- The tax and payments section is for companies who were previously a traditional corporation and need to calculate any taxes.
- Complete the 13 questions on Schedule B.
- Complete Schedule K.
- Form 1120S Schedule L is where you list assets, liabilities, and S corporation equity each tax year.
- Schedule M-1 is also mandatory if you don't answer yes to both parts of question 10 in Schedule B.
- Complete Form 1120S M-2 if necessary, which discusses undistributed net income.
Don't assume that because S corporations don't owe taxes on profits that preparing the tax filing for an S corporation is easy. Unless you're a tax expert, you should consider working with a skilled tax professional. And, if you're unable to file by the March 15th deadline, you can use IRS Form 7004 to request a six-month extension. However, the form needs to sent in before March 15 as well.
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