Key Takeaways

  • An S corp tax return is an informational filing, as S corporations generally do not pay federal income tax directly. Instead, income and losses pass through to shareholders.
  • S corporations must file Form 1120-S annually, along with Schedule K-1 forms for each shareholder detailing their share of income, deductions, and credits.
  • Schedule B reports ownership interests, total receipts, and other financial details. Additional schedules like M-1 and L may be required for larger corporations.
  • S corps must also manage payroll tax responsibilities (Forms 941, 940, W-2, and W-3) and comply with state tax requirements, which can include separate returns or franchise fees.
  • Accurate recordkeeping, proper shareholder distributions, and understanding deductions and tax-saving strategies are key to minimizing tax liability.
  • Missing filing deadlines can lead to significant IRS penalties, but timely filing or requesting an extension with Form 7004 can help avoid them.

S corp tax returns are different from the returns of other business entities in that an S corporation does not pay any tax to the Internal Revenue Service (IRS). Instead of filing as a corporation, the income and deductions are "passed-through" to the corporation's shareholders to be reported on individual personal tax returns.

Information on S Corporation Taxation

While an S corporation does not file a tax return to pay income tax that may be due, it does file an annual tax return on Form 1120S. The form is for informational purposes only and is filed with the IRS to provide information on the earnings and expenses of the business.

An S corporation must prepare a separate K-1 for each of the corporation's shareholders. The form is to show their respective share of the earnings and deductions. For example, if an S corporation earns $1 million in revenue and lists $500,000 in deductible expenses and has 10 shareholders, there would be 10 forms with K-1 information filled out - one for each shareholder - listing $100,000 in revenue and $50,000 in expenses. The K-1s are then attached to Form 1020S and submitted to the IRS.

The date for filing corporations" rel="nofollow" target="_blank">Form 1120S and K-1s with the IRS is the 15th day of the third month following the close of the tax year. This makes the due date March 15.

Understanding Form 1120-S and Shareholder Reporting

Form 1120-S is the backbone of the S corp tax return. Although S corporations are generally not subject to federal income tax, they must still file this form annually with the IRS. It reports the company’s gross income, deductions, credits, and other financial details, serving as a transparent record of the corporation’s activity.

Each shareholder receives a Schedule K-1 showing their share of the company’s income, deductions, and other tax items. Shareholders must include this information on their individual tax returns, regardless of whether they actually received distributions. This means they may owe tax on profits even if they remain in the business for reinvestment.

It’s also important for S corps to maintain accurate records of basis, which represents each shareholder’s investment in the company. Basis determines how much loss they can deduct and whether distributions are taxable. Distributions exceeding basis may be taxed as capital gains.

Common Deductions and Credits for S Corporations

Although S corporations are pass-through entities, they can still benefit from a variety of deductions and credits to reduce taxable income passed through to shareholders. Some common deductions include:

  • Business expenses such as rent, utilities, marketing, and professional services
  • Salaries and wages paid to employees (including shareholder-employees)
  • Retirement plan contributions for employees
  • Health insurance premiums paid by the company
  • Depreciation of business property and equipment
  • Qualified Business Income (QBI) deduction – up to 20% of pass-through income may be deductible under IRC §199A, subject to eligibility rules.

These deductions can significantly reduce the taxable income reported to shareholders. However, the IRS closely scrutinizes reasonable compensation for shareholder-employees. Paying too little salary and taking larger distributions can trigger audits and penalties.

Schedule B Filing Information

Schedule B is part of the 1120S filing process and includes:

  • Whether the corporation owns stock in other corporations.
  • Any ownership interest in any partnerships.
  • The amount of the corporation's total receipts and if they were less than a specified amount.
  • If the total assets of the corporation at year-end were less than a certain amount.

At the end of the year, if the total assets of the corporation are less than the amount designated, the following forms will not need to be filed:

  • Reconciliation of Income (Loss) per Books with Income (Loss) per Return (M-1)
  • Schedule L
  • Balance Sheets per Books

An S corporation is also required to file a summary of information that includes income, credits, deductions, and other items that pass through to the shareholders. The summary information is listed in the Schedule K - Shareholders' Pro Rata Share Items sections.

Shareholders must include the amounts reported on the K-1 on their personal tax return.

For S corporations with employees, employment taxes must be withheld from their wages. As a rule, a shareholder providing services to the S corporation must be paid a salary. This rule also applies to officers whether they are or aren't shareholders.

S corporations are also responsible for filing quarterly employer tax returns using Form 941.

At the end of the year, each employee must be issued a Form W-2, Wage and Tax Statement. Copies of the W-2s and Transmittal of Wage and Tax Statements (Form W-3) must be filed annually by the last day of February.

Some states require the profits earned by an S corporation to be subject to federal tax. In other states, a flat fee is assessed on S corporations. In those states, an S corporation must file separate tax returns. States that don't assess taxes or fees on an S corporation are often required to file an informational return.

A state-withholding tax account will need to be set up to pay state and federal taxes for your corporation. Contact the Department of Revenue for your state for information about these taxes.

State-Level S Corp Tax Return Requirements

While S corporations are exempt from federal income tax, state taxation varies widely. Many states require an informational return similar to the federal Form 1120-S, while others impose a franchise tax or gross receipts tax. A few states (like New York and California) levy a minimum tax or annual fee based on income or net worth.

Additionally, if the S corporation operates in multiple states, it may need to file multiple state tax returns and allocate income based on apportionment formulas. Failure to comply with state requirements can lead to significant fines and loss of good standing.

Because of these differences, it’s essential for businesses to check state-specific rules and possibly consult a tax professional to ensure compliance.

S Corporation Federal Tax Filing Dates

  • S corporations generally must file an informational income tax return each year.
  • Annual tax returns for an S corporation must be filed by March 15. This equates to the third month and the 15th day of that month at the end of the tax year.
  • Form 1120S and Schedule K-1 must be filed together.
  • If the March 15 filing day is not possible, an automatic extension can be obtained by filing Form 7004.
  • Shareholders paying taxes on corporate income must follow the same filing guidelines set by the IRS for individuals, which means filing by April 15.
  • For S corporations paying more than $1,500 in wages in a calendar year or having at least one employee working 20 or more separate weeks for at least a portion of the day, Form 940 must be filed.

Extensions, Late Filing Penalties, and Compliance Tips

If your S corporation cannot meet the March 15 deadline for filing Form 1120-S, you can request an automatic six-month extension by submitting Form 7004. This moves the due date to September 15. However, this extension only applies to filing — not to paying any taxes owed by shareholders.

Failure to file on time can result in significant penalties. The IRS assesses $245 per shareholder per month (for returns due in 2025) for up to 12 months for late filings. With multiple shareholders, these penalties can quickly become substantial.

To ensure compliance and minimize risk:

  • Maintain detailed financial records throughout the year.
  • File payroll and employment tax forms (e.g., Forms 941, 940) promptly.
  • Distribute and file all Schedule K-1s accurately.
  • Review shareholder basis annually to prevent errors in reporting.

Frequently Asked Questions

  1. Do S corporations pay federal income tax?
    No, S corporations typically do not pay federal income tax. Instead, income, losses, and deductions are passed through to shareholders, who report them on their personal tax returns.
  2. What forms are required for an S corp tax return?
    The main form is Form 1120-S, which must include Schedule K-1 for each shareholder. Additional schedules such as Schedule B, M-1, and L may also be required depending on the corporation’s size.
  3. Can an S corporation deduct health insurance premiums?
    Yes. Health insurance premiums paid for employees — including shareholder-employees — are generally deductible, provided they meet IRS requirements.
  4. What happens if an S corp misses the filing deadline?
    Late filings can result in penalties of $245 per shareholder per month, up to 12 months. Filing Form 7004 can help you avoid these penalties by extending the due date.
  5. Are state taxes required for S corporations?
    Yes, most states require S corporations to file state-level returns or pay franchise or gross receipts taxes. Requirements vary significantly by state, so businesses should review their local tax obligations.

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