S-Corp Taxation S-Corp must file a separate tax income tax return on form 1120S but it does NOT pay its own taxes. Instead, here is a simple breakdown:
● All net profit from an S-Corp is passed-through to it’s shareholders via K-1
● The net profit reported on a K-1 for each shareholder is then reported on the shareholder’s personal tax return, after which:
● Shareholder pays his/her share of taxes depending on his/her tax bracket on the income received from the S-Corp.
● S-Corp is ALWAYS required to file its taxes even if there was no activity during the year. Penalty for not filing a timely tax return is $195 per shareholder up to 12 months.
● S-Corp tax return (Form 1120S) must be filed by March 15 of each year. When the 15 falls on a weekend, the return is due the following business day
Making S-Corp Election In order for you to make an S-corp election you must first either:
● Form a domestic US-Corp or
● organize a Limited Liability Company (LLC). After which you must make an S-corp election by filing form 2553 with the IRS within 75 days of your company’s formation. You may also need to file a separate S-Corp election with your state. Most states do not require a separate election. If you file for an S-Corp election after 75 days after your company’s formation, the IRS will still grant you late election.
Why S-CorpLet’s take a step back and talk about why most business owners choose an S corp tax status? When a business files taxes as a sole proprietor or as a partnership, it pays self-employment tax of 15.3% (Social Security & Medicare) on all of its net profit.
For example: Your net profit from your business is $130K. Your self employment tax on 130k net profit is $19,890. By electing to be taxed as an S-Corp, a business does not pay 15.3% self-employment tax on the net profit. Instead, the net profit from an S corp is passed-through to its shareholders. But each shareholder is required to pay him/her a salary. Only the salary of the shareholder is subject to self-employed taxes.
For example: Your net profit from your business is $130K. You elect to be taxed as an S-Corp and your salary is $70,000. Your self employment tax is now 10,710 saving you an estimate of $9,180 ($19,890 – $10,710).