S Corp Tax Software: Optimize Filing & Maximize Savings

Key Takeaways

• S corporations avoid double taxation by passing income through to shareholders.
• Shareholders must pay themselves a reasonable salary, which affects tax liability.
• The right S corp tax software can streamline compliance, payroll, and shareholder reporting.
• Features like audit support, e-filing, and K-1 generation are critical for S corps.
• Top software includes options like TurboTax Business, H&R Block Premium & Business, and TaxAct.
• Cloud-based and industry-specific software can help automate recordkeeping and reduce tax-time stress.
• UpCounsel can connect business owners with attorneys for S corp setup and tax planning.

Introduction to S Corporation Taxation

An S Corporation tax is levied on businesses that elect to be structured as such. This election will determine how the company is taxed at a corporate level as well as how their shareholders are taxed.

When a corporation chooses to be structured as a C corporation, they will have to file a tax return by measuring the business' income and using corporate tax rates to determine what they owe. When a C corporation pays its shareholders through earned dividends, the shareholder will also pay taxes on the personal tax return for those earnings. This is known as double taxation.When a business is treated as an S corporation, the taxes will only be collected at the shareholder level. While the corporation will file an annual tax return to determine the total amount of taxes that will be owed, the corporation will not be the one to pay the liability. Instead, each shareholder will be responsible for paying their portion of taxes on the income through their personal tax returns. The shareholder will also record their business deductions and credits for their portion of the business as well in their personal tax return. With this type of taxation, S corporations will not be subject to the double taxation that C corporations face.Because there is no corporate tax levied at the corporate level, the income taxes will be paid at the shareholder's personal income tax rates. To determine the amount each shareholder will pay, you will use the IRS Form 1120S for the corporation's tax return and Schedule K and K-1s will be used with the shareholder's personal tax return.Since an s corporation is required to be a domestic corporation, if the corporation loses money, the shareholder will often be able to account for those losses on their tax return. For example, if an S corporation owned by two people has a loss of $9,000 in a year, typically each shareholder will be able to write off $4,500 of the loss on their individual tax return, saving them a significant amount.An S corporation is only allowed to have 100 shareholders, and they all must be United States citizens. If your business meets this restriction, structuring it as S corporation can be a great option to reduce the taxes a corporation will be required to pay. Individuals who are self-employed will need to pay federal, state, and city income tax as well as Social Security and Medicare taxes.

There are some things you will need to consider when deciding if the S corporation structure is right for your business.

• An S corporation allows the owner of the business to be taxed on a portion of the business profit.
• While you pay fewer taxes, the IRS may look more closely at your taxes since your overall tax liability will be reduced.
• Your business profit will be separated into two categories: shareholder's wages and distributive share.
• Since an S corporation operates as a pass-through tax entity, the owner may still face tax rates as individuals. This amount may vary depending on how much participation they have in the business.
• Active shareholders will be expected to participate in the daily activities of the business.
• An owner of an S corporation will most likely be paid a salary which will be taxed for FICA at the payroll level.

Choosing the Right S Corp Tax Software

Selecting effective S corp tax software is essential for maintaining compliance and minimizing tax liabilities. Because S corporations pass income, losses, and deductions through to shareholders, the software must handle complex reporting, including Schedule K-1 generation, payroll tax compliance, and audit preparedness. Here are key considerations when evaluating software options:

Key Features to Look For in S Corp Tax Software:

• K-1 Form Preparation: Ensures accurate reporting for each shareholder’s portion of income.
• E-Filing Capabilities: Streamlines submission of IRS Form 1120S and Schedule K-1s.
• Payroll Integration: Assists in managing shareholder salaries and calculating payroll taxes.
• Audit Support: Some software offers audit assistance or representation in case of IRS scrutiny.
• State Return Support: Supports multi-state filings if your S corp operates across state lines.
• Cloud-Based Access: Allows multiple users (e.g., accountant and business owner) to collaborate in real-time.
• Import/Export Capabilities: Facilitates importing prior-year returns or QuickBooks data to save time.

Popular software choices include:

• TurboTax Business: Offers robust support for S corp returns, step-by-step guidance, and user-friendly navigation.
• H&R Block Premium & Business: Great for those who want in-person tax support plus comprehensive software.
• TaxAct Business: A cost-effective option for straightforward S corp filing.
• Drake Tax and ProSeries: Common among tax professionals, offering more advanced tools and integrations.

Each platform varies in pricing, user interface, and included features. When selecting software, consider your comfort level with tax preparation and whether you need CPA-level features or small-business-friendly automation.

If your S corporation operates in a niche industry (e.g., real estate, healthcare, or construction), look for software that includes industry-specific deductions and credits. Consulting an accountant or tax attorney during software selection may be beneficial to ensure compliance and tax efficiency.

Considerations for Salary

There are many things that will be considered when determining an owner's salary. Some things that may affect the level of tax paid include:

• The owner's duties and responsibilities.
• Their training and experience.
• The amount of time they devote to business affairs.
• The wages that are paid to non-shareholder employees.
• The dividends that stockholders receive.
• The amount other businesses would pay for similar employment services.

In essence, shareholders of an s corporation will end up being taxed on what should be their portion of the business profits, whether they received those dividends or not. Additionally, a shareholder in an S corporation will be allowed to receive distributions that are not taxed as long as the amount does not exceed their cost basis in the S corporation.

S Corp Software vs. Hiring a Tax Professional

While S corp tax software can streamline the filing process, there are circumstances where hiring a tax professional may be the better option. Below is a comparison to help guide your decision:

If your business situation is relatively simple, software may suffice. However, for S corps with multiple shareholders, significant assets, or cross-state operations, a tax professional can offer custom strategies and ensure proper compliance.

You can also find a qualified attorney on UpCounsel to guide your S corporation’s formation, salary planning, and tax strategies.

Tax Filing Tips and Deadlines for S Corporations

Timely filing is crucial for avoiding penalties. Here’s what S corporation owners should keep in mind:

Key Filing Deadlines:

• Form 1120S (S Corp Tax Return): Due by March 15 each year (or the 15th day of the third month after the end of the tax year).
• Schedule K-1 to Shareholders: Must be distributed by the same March 15 deadline.
• Extension Filing: Use Form 7004 to request a six-month extension, moving the deadline to September 15.

Filing Tips:

• Keep Detailed Records: Maintain books year-round to ensure all shareholder distributions, salaries, and business expenses are accounted for.
• Separate Distributions from Salaries: Ensure shareholder salaries meet the IRS’s “reasonable compensation” requirement to avoid audits.
• Track Basis Adjustments: Shareholder tax basis in the company affects their ability to deduct losses.
• Reconcile Books Before Filing: Discrepancies between accounting and tax records can trigger delays or audits.

Using S corp tax software can help avoid late filings and errors by providing reminders and automatic form population. Many platforms allow filing federal and state returns simultaneously.

Frequently Asked Questions

1. What is the best S corp tax software for small businesses?
   TurboTax Business, H&R Block Premium & Business, and TaxAct are top choices, offering features tailored to S corporation filing, including K-1 support.
2. Can I file my S corp taxes myself?
   Yes, with the right tax software, many small business owners can file their S corp taxes. However, consulting a professional is recommended for complex returns.
3. Do I need special software to file Form 1120S?
   Yes, Form 1120S is specifically for S corporations and not all tax software supports it. Ensure your software includes this form before purchasing.
4. What happens if I file my S corp taxes late?
   You may face penalties of $210 per shareholder per month for late returns. Filing an extension with Form 7004 can help you avoid this.
5. Is S corp tax software worth it compared to hiring an accountant?
   For straightforward returns, software may suffice. But for businesses with multiple shareholders or unique tax needs, a tax advisor can provide personalized support.

If you need help learning more about S corporation taxation, 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.