The S Corporation is a special type of corporation that combines the form (with some limitations) of a C Corporation and the tax treatment of a Partnership. The IRS defines it as an entity specifically for tax purposes.
A business must elect to be treated and taxed as an S Corporation (using Form 2553); specific rules apply to ensure this designation. You should consult a competent professional, such as a Certified Public Accountant or Enrolled Agent, before setting up this type of entity.
How Are S Corporations Taxed?
The S Corporation, like the Partnership [link to Partnership blog], does not pay taxes.
Each year, the profit or loss of the S Corporation “passes through” to the individual shareholders; the percentage of shares they have determines their profit and the taxes they will owe. The shareholders pay taxes on their personal returns, considering this passed through profit or loss and using their individual tax rates.
The shareholders are not subject to self-employment taxes on their personal tax returns; all else being equal, this can be an advantage over a Sole Proprietorship or Partnership. S Corporations also do not give rise to “double-taxation” like C Corporations because they pay non-taxable distributions instead of taxable dividends. Again, it is best to discuss the tax consequences of an S Corporation with a tax professional.
What Tax Form Does an S Corporation File?
The S Corporation files a federal Form 1120S, due by the fifteenth day of the third month after the corporation’s year-end. (This is typically March 15 of the following year for a tax year ending on December 31.) A six-month extension is available. Please note: extensions extend the time to file the return, not the time to pay.
Form 1120S is an information return that provides each shareholder with information about their share of the corporation’s income and deductions. Each shareholder receives a Schedule K-1 detailing their specific share of these items.
Estimated Taxes for an S Corporation
Since the S Corporation does not pay taxes, it does not make estimated payments. However, since profit and loss flow to the shareholders, and they are subject to taxes on those amounts, they may have to make individual estimated tax payments (similar to a Sole Proprietor or Partner, with the exception of self-employment taxes).
Payroll Taxes for an S Corporation
Shareholders generally receive distributions (not considered payroll) and are not subject to payroll taxes. They are also not subject to self-employment taxes on their individual tax returns.
The S Corporation is responsible for payroll taxes on all salaries, wages, and other compensation of non-partner employees. Any shareholders involved in day-to-day operations must receive a reasonable wage or salary, and the S Corporation is responsible for payroll taxes on those amounts.
Payroll taxes can be a significant cost of doing business with potential ramifications on cash flow and should not be ignored by any business.
Ignoring your tax obligations can be disastrous for your business. Failing to plan or comply with tax laws can have severe financial repercussions. Protect your business by consulting with a Certified Public Accountant to ensure you understand and meet all your tax responsibilities.