S Corporation Income Tax: Everything You Need to Know
To complete an S corporation income tax return, you need to be aware of how this business structure influences taxes owed.3 min read
To complete an S corporation income tax return, you need to be aware of how this business structure influences taxes owed. S corporations are similar to C corporations, yet they differ in that they elect to pass all of the corporation's losses and profits through to their shareholders. In turn, shareholders of S corporations report these flow-through values on their personal tax returns. This allows S corporations to avoid double taxation.
What Is an S Corporation?
When starting a business in the United States, corporations can choose to be taxed at either the shareholder level or the corporate level. When paying taxes at the corporate level, corporations file their own tax returns. Taxable income is then subject to corporate tax rates. This tax treatment is associated with a C corporation. Once a C corporation distributes profits, also known as "dividends," to shareholders, the received dividends are then taxed at the shareholder level.
In comparison, when operating an S corporation, there is no income tax applied at the corporate level. However, the corporation's income is still taxed on each shareholder's personal tax return based on their share of profits, losses, and deductions. The letter "S" refers to the Subchapter S of Chapter 1. In addition, S corporations are also the following:
- Corporations that benefit from pass-through taxation. This means that all of the corporation's income is passed onto its shareholders for federal income tax purposes.
- Companies with shareholders who report all flow-through profits and losses on their personal returns and are taxed at individual income rates. This means that S corporations avoid double taxation.
- Limited to 100 shareholders, all which must be citizens of the United States.
How Are S Corps Taxed?
As discussed, S corporations do not pay taxes at the federal level. Instead, all profits are allocated to the company's shareholders. As an owner of an S corporation, you will face similar tax rates as individual wage earners. With that being said, how much you pay will depend on how you participate in the business. Passive shareholders do not participate in the day-to-day operations of the company, whereas active shareholders play a much more active, daily role.
In order to file an S corporation's annual tax return, use Form 1120S. Similar to a partnership, a K-1 is given to each owner. Regardless of whether you are employed or self-employed, you will need to pay Medicare and Social Security taxes. As an employee, you only pay a portion of these taxes, and your employer pays the remaining balance. In contrast, if you are self-employed, you are responsible for the whole amount.
If you decide to organize your business as an S corporation, you will be able to classify some of your income as a distribution and some as salary. On the salary portion of your income, you will be liable for self-employment taxes. However, on the distribution portion, you will simply pay ordinary income tax. In turn, this could help you save a significant amount of money.
S Corp Federal Filing Dates
Each year, S corporations are required to file an informational tax return. This return is always due on the 15th day of the third month, following the end of the corporation's tax year. Most often, this will be March 15. Form 1120S must be accompanied by a K-1 for each individual shareholder. If you cannot meet this deadline, you can seek an automatic six-month extension by filing Form 7004.
As a shareholder, you will need to pay tax on your portion of the corporation's income. Payment is subject to the same deadline as individual taxpayers and is typically due on April 15. In addition, all S corporations that pay employee wages are required to withhold Medicare and Social Security taxes from each paycheck. They must then file Form 941 four times a year on January 31, April 30, July 31, and October 31.
When you form an S corporation, it is imperative that you understand your responsibilities in terms of taxation. This will help you remain organized and plan ahead. By practicing due diligence from day one, you can ensure that your corporation remains in good standing. This will also help you avoid any unnecessary penalties. If at any time you have any questions, please seek professional advice.
If you need help with your S corporation income tax return, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.