S Corporation Tax Filing

An S Corporation (S-Corp) is a legal structure that made a tax election to allow the business owners to have profits and losses pass through the business to the owners. S-Corps are not subject to income tax, rather they are pass-through entities. While the S-Corp itself is not taxed on its income, each of the owners will be taxed on their share of income from the S-Corp.

With an S-corp, shareholders are paid a salary and the business pays their payroll taxes, which can be deducted as a business expense from the company’s taxable income. If the business has leftover profits, they are distributed to shareholders as dividends – which have a lower tax rate than regular income.

Considerations When Structuring S Corporation

S corporations can be the right choice if you are looking for a company structure that provides the advantages of a corporation along with pass-through taxation. However, there are requirements that must be met in order to make the election and they must continue to be met for the election to remain valid. The advantages of being a corporation must be balanced against the lack of flexibility and the more extensive formalities imposed on a corporation versus an LLC.

Filing Requirements

S-Corps report their activity to the IRS on Form 1120-S, the U.S. Income Tax Return for an S Corporation. A Schedule K-1 reports each owner’s share of the S-Corp’s profits and losses, and the K-1 is used to prepare the individual’s personal tax return. The IRS requires S-Corp owners to pay themselves reasonable employee salary for the work the owner provides to S-Corp.