1. Overview of S Corporation Taxation
2. Late Filing Penalties

S corp tax return Form 1120S is used for informational purposes when filing an annual tax return. S corporations do not pay income tax and the form serves as a means of information for the Internal Revenue Service (IRS) regarding the corporation's aggregate earnings and expenses.

Overview of S Corporation Taxation

In most cases, corporations are subject to C corporation tax rules, which means the corporation is taxed twice. The double taxation occurs at the business level when paying income tax on earnings, and again at the shareholder level once they've received after-tax dividends and file their individual tax return.

S corporations are not responsible for paying income tax to the Internal Revenue Service. S corps "pass-through" the income and deductions to each shareholder in much the same way a partnership operates. Shareholders will then file individual tax returns and report their share of the income and deductions.

An S corporation will also file a separate K-1 along with Form 1120S. A K-1 is prepared for each of the corporation's shareholders to report individual earnings and deductions. As an example, a corporation with 10 equal shareholders earns $1 million and reports $500,000 in expenses. In the majority of cases, 10 K-1s will be attached to Form 1120S with each form reporting $100,000 in revenue and $50,000 in expenses for each individual shareholder.

Shareholders receive a copy of their individual K-1 that was prepared by the corporation. For their part, shareholders must incorporate the amounts reported on the K-1 on their personal income tax return and file by the applicable due date, which for most is April 15.

All forms are due to the Internal Revenue Service at the close of the tax year, which usually falls on March 15. For S corporations unable to meet the filing deadline, an automatic extension of six months is available by filing IRS Form 7004.

If the S corp has employees, it is responsible for withholding federal income tax, Medicare, and Social Security taxes from each employee's paycheck. To account for the taxes being held, the corporation is required to file Form 941, quarterly, to report the aggregate amount being withheld to the IRS. The filing dates for Form 941 are January 31, April 30, July 31, and October 31.

For corporations paying wages of $1,500 or more in a calendar quarter, or if the corporation has a minimum of one employee working any part of a day in 20 or more separate weeks, Form 940 is required. Its purpose is to report the amount the corporation owes in unemployment taxes, which must be remitted to the IRS. The filing due date is normally January 31 annually. An exception is that if the amount owed is paid on time, the IRS allows a corporation to file by February 10.

To obtain S corporation status, a company must make the election no later than two months and 15 days prior to its effective date. For example, a company that wants to be treated as an S corp for 2017 would file Form 2553 by March 15, 2017, with the IRS.

For corporations whose tax year is the same as the calendar year, the effective date will be January 1 of the year the S corp status takes effect. If the corporation is operating on a fiscal year, S corp status takes effect on the first day of the fiscal year. For example, a fiscal year running from July 1 through June 30 means the S corp status will be in effect on July 1.

Late Filing Penalties

  • When an S corporation fails to file Form 1120S on time or by the extended due date, a minimum penalty of $195 for each full month or each partial month is imposed by the IRS. The $195 penalty fee is multiplied by the number of shareholders participating in the corporation.
  • If a corporation files Form 941 after the deadline and there is an unpaid tax balance, the business will be assessed a 5 percent penalty on the balance each month or partial month the tax remains late. The penalty percentage can increase to a maximum of 25 percent.
  • The IRS imposes similar penalties when a corporation fails to file Form 940 after its due date.

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