Taxes for S Corps: Everything You Need to Know
Taxes for S corps include FICA taxes, Federal Unemployment Tax, LIFO tax, and excess net passive income tax.4 min read
Taxes for S corps include FICA taxes, Federal Unemployment Tax, LIFO tax, and excess net passive income tax. S corporations are not subject to federal double taxation. Therefore, they are not eligible for federal corporate tax. The shareholders of S corps are not exempt from taxes arising from the S corp and must pay personal income tax at rates similar to all other U.S. citizens.
S Corps and Pass-Through Status
S corps have pass-through status and do not pay tax to the IRS. This means the IRS does not levy taxes on the S corp as a business. However, any income the S corp earns is passed through to the shareholders of the business who must pay personal income tax. Although the shareholders of an S corp still need to pay personal income tax and other taxes, the S corp arrangement can enable owners of some small corporations to save thousands of dollars on taxes every year.
All new corporations are initially given the C corp tax treatment by the IRS. C corporations do not have pass-through tax treatment and must pay corporate tax on the corporation's profits at rates as high as 21 percent. Owners of S corporations that meet the requirements can apply using IRS Form 2553 to get S corp status.
S corp treatment is not given to corporations with the following characteristics:
- Corporations that have more than 100 shareholders.
- Corporations that have non-U.S. citizens that do not reside in the U.S.
- Corporations that have more than one type of stock.
- Corporations that have corporate shareholders.
S Corporation Taxes
- Excess Net Passive Income Tax. S corporations whose income from passive activities exceeds 25 percent of the corporation's gross receipts must pay corporate tax on the excess income from the passive activities. The tax is charged at a rate of about 21 percent of the excess passive income. Passive income includes income from royalties, interest, and rent. This tax practically disqualifies real estate businesses and investment firms from filing as S corporations.
- Federal Unemployment (FUTA) Tax. FUTA tax is paid by S corporations that have employers and have paid $1,500 or more to employees in any quarter, or corporations that have at least one employee who has worked for part of a day for 20 or more weeks in any quarter. S corporations with farm employees have less stringent requirements. This tax, charged at a rate of about 6 percent of the wages, is paid using IRS Form 940. Other taxes S corporations may pay include the LIFO tax and built-in gains tax. LIFO tax is paid if the S corporation used the LIFO accounting method in its last year as a C corp, while built-in gains tax may be paid by some S corps that sold assets within five years of obtaining them.
- FICA Taxes. These taxes are part of payroll taxes and were established by FICA. They include Medicare and Social Security taxes. They are charged at a rate of about 15.3 percent of the wages, with the employee and the S corporation contributing half of the tax. The taxes are filed quarterly using Form 941.
- State Franchise Tax. Some states require their S corporation to pay a franchise tax. The rates and method of calculating the tax differ from state to state. You can find details about the tax from your state's Revenue Department or Corporations Division.
- State Excise Tax. Some states require manufacturing corporations to pay excise tax. Details about the filing of this tax can be obtained from the state's Department of Revenue.
Taxes for S Corp Shareholders
- Personal Income Tax. Each S corporation shareholder must pay income tax on his or her share of the corporation's earnings. Personal income tax is charged at a rate of 10-37 percent of the shareholder's income. This tax is filed using a Schedule K-1 received from the S corp. The S corporation must, in addition to its Form 1120S, file copies of each shareholder's Schedule K-1s to verify the income.
- Net Investment Income Tax. The Net Investment Income Tax is levied on inactive S corp shareholders who earn over $200,000 ($250,000 for couples that file jointly) from the S corp in a tax year. The tax is charged at a rate of 3.8 percent of the income above $200,000 or $250,000 for couples that file jointly.
- State Personal Income Tax. Some states require S corporation shareholders to pay state income tax. You can find out about the rates of such taxes from the state's revenue department.
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