Looking at an S corp tax return example, you can learn more about how taxes are filed in this type of business organization. Despite the fact that income "passes through" to shareholders, preparing an S corporation tax return can be a lot of work, but it does provide tax saving opportunities for small businesses. Because of the complexities, it's best to have a qualified tax professional assist. 

What to Know about S Corporation Filings

There is additional accounting required, including payroll accounting for employees. S corporations are required to pay employees a "reasonable salary." This applies even when there is only one shareholder and employee. IRS Form 941 deals with federal-level payroll accounting. You must also file IRS Form 940, which covers federal unemployment tax, or FUTA. 

S corporations also have to prepare and send out W-2 and W-3 forms, which detail earnings and taxes for the Social Security Administration and IRS. All forms are available at www.irs.gov. 

S corporations that have less than $250,000 revenue and own assets under the $250,000 threshold as well primarily need to worry about preparing a profit and loss statement. This is something that can be prepared easily on Quicken or QuickBooks. 

Be sure to check your bank accounts prior to preparation to ensure there are no discrepancies. If you are working with a tax professional, be sure they know about any purchases that aren't reflected in the profit and loss statement. For very small businesses, you may even be able to prepare your statement in an Excel spreadsheet. 

Filing S Corporation Returns

Download IRS Form 1120S and follow the instructions. However, it is highly recommended that you don't attempt to file S corporation tax returns on your own. To really take advantage of tax benefits afforded to S corporation status holders, utilizing a skilled CPA who understands the S corporation law is important. If you still aren't sold on using a paid professional, at least buy one of the tax preparation packages for consumers. You can find these from places like TurboTax for Business. 

Remember a couple helpful tips when it comes to filing your S corporation tax returns: 

  • Get your profit and loss statements to your tax preparer as soon as possible in January. 
  • If you need to file an extension, use Form 7004. 
  • If your S corporation total assets or revenues exceed $250,000, your returns need to include balance sheets at the beginning and end of the year. 
  • Don't forget that tax on profits are passed along to your shareholders and they are the ones who actually pay the income tax. 

There are some general steps that go into filing the S corporation tax return, Form 1120S. Get all the necessary information you'll need for the form This information includes a variety of documents and confirmation of dates: 

  • S corporation election date
  • Your business activity code that identifies the industry you're in (manufacturing, technology, etc.)
  • What product or service is the majority of your income derived from
  • How many total shareholders you have 
  • Employer Identification Number, or EIN
  • What was your incorporation date 
  • Identify whether this is your first year filing S corporation status
  • Income statement (or profit and loss statement)
  • Balance sheet that summarizes owner equity, assets, and liabilities
  • Cash or Accrual accounting method
  • 1099 reports 

Next, you'll fill out the general information section that talks about your basic business information. This is where you'll add your effective date, business activity code, EIN, and incorporation date. The income and expense section primarily pulls from your income statement. The tax and payments section should include the estimated taxes paid during the year, along with any credits from the prior tax year. 

Schedule B accompanies Form 1120S and consists of 13 questions that require yes or no answers. Prepare Form 1120S Schedule K, which is a summary of the shareholders' income, deductions, and credits for that tax year. Schedule K-1s are sent to the shareholders so they can prepare their personal taxes. Prepare Form 1120S Schedule L which details assets, liabilities, and S corporation equity for the IRS. 

You may or may not be required to file Form 1120S Schedule M-1 based on some of your answers in Schedule B. Schedule M-1 discusses any differences between financial statement reports versus what is taxable. Finally, you need IRS Form 1120S Schedule M-2 which reconciles any undistributed net income. 

Once again, it's important to reiterate filing S corp tax returns yourself is not recommended. At a minimum, consider purchasing QuickBooks or TurboTax software. 

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