S Corp Tax Rate

An S-corporation tax rate is a tax on a domestic corporation with which all corporate income is sent directly to the owners who are paying taxes on the income. An S-corporation is only permitted a maximum of 100 shareholders and all of these shareholders must be U.S. citizens. S-corporations cannot operate underneath other businesses; they are a separate entity.

A corporation uses corporate tax rates to calculate its taxes, track taxable income, and file a corporate tax return when it decides to be taxed at a corporate level. A C-corporation provides shareholders with dividends as a form of profit. The dividends that each shareholder receives is considered taxable income. However, an S-corporation does not operate the same way a C-corporation does and below we’ll examine some core differences.

9 Things S-Corporation Owners Need to Know about Income and Tax Rates

  1. Owners of S-corporations are subject to marginal tax rates just as wage earners are.
  2. How much involvement an owner has in the S-corporation will determine who much that owner will pay in taxes.
  3. S-corporation owners are required to pay federal income taxes, state taxes, and local income tax.
  4. There is an extra 1.18 percent marginal tax rate caused by Pease limitations on all itemized deductions.
  5. The ACA Net Investment Income Tax and payroll tax affect S-corporations differently and therefore how S-corporation owners are taxed will vary.
  6. An S-corporation has two types of shareholders: active and passive.
  7. An active shareholder is involved in the daily operations of the corporation and usually garners income through both profit distribution and wages. Their wages are taxed three ways:

●      15.3 percent on the first $117,000

●      2.9 percent on the $83,000 after  $117,000

●      3.8 percent of income over $200,000

  1. Although wages are taxed, profit distribution is not. Because of this, S-corporations often try to pay very little in wage income and instead distribute a significant amount of profit instead. However, there are specific guidelines set forth by the IRS on how profits can be distributed.
  2. Passive shareholders do not earn any wages from an S-corporation and therefore their income is not subject to payroll tax. In place of payroll tax, passive shareholders are subject to the ACA’s Net Investment Income Tax. This only affects anyone who makes an annual income of $200,000 or more and $250,000 for anyone who is married and filing jointly. Passive shareholders are often hit with more marginal tax than their active shareholder counterparts.  

S-Corporation Tax Forms

The form that you need for your S-corporation annual tax return is Form 1120S. With a partnership, Schedule K and K-1 must be filled out to show what deductions each owners receives and what the income of each owner is.

Self-Employment Tax vs. S-Corporations

Every business owner is subject to self-employment taxes which are used to pay Medicare and Social Security. When you incorporate your business entity as an S-corporation, you can reduce some of your taxes. One of the primary advantages of incorporating your business as an S-corporation is that the shareholders of an S corporation are not required to pay self-employment tax on business profits.

Determining a Reasonable Salary for S-Corporation Shareholders

There are no set guidelines in the tax code that show a business owner how to determine shareholder’s salaries. Some things to consider in order to make the decision process easier are

  1. What responsibilities each shareholder has
  2. How experienced each shareholder is
  3. How committed each shareholder is to the corporation
  4. Dividends each shareholder receives
  5. Wage income of employees who are not shareholders
  6. The salaries set forth by businesses similar to your business

General Rules for Cost Basis in an S-Corporation

● Every S-corporation shareholder has their share of profits taxed even if they didn’t receive those profits.

● However, if distributions aren’t higher than the shareholder’s cost basis, that shareholder is not taxed on distributions.  

● A shareholder’s cost basis can be increased according to how much he contributes to the corporation and by his share of the corporate income. It can be decreased by distributions and losses in the business.

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