S corporations are pass-through tax entities. That means that instead of an S corporation itself paying federal tax on its business profits, the obligation to pay those taxes passes through the corporation to the individual shareholders. However, this doesn’t mean S corporations themselves are simply ignored by the IRS. On the contrary, an S corporation definitely is recognized by the IRS as a separate entity from its shareholders—and is required to file various returns and other forms with the IRS.
Here is a brief overview of the tax forms a typical S corporation needs to file with the IRS.
An S corporation starts out life as a traditional C corporation formed under state law. Then, at some point after filing corporate formation papers with the Secretary of State (or equivalent state office), and possibly immediately after formation, the shareholders formally consent to the corporation electing S corporation tax status. The corporation also must meet a few basic requirements in order to be eligible to make the S corp election. Namely:
If you have unanimous shareholder consent, and your corporation meets the foregoing requirements, you gain S corporation status by completing and filing IRS Form 2553, Election by a Small Business Corporation. The form is straightforward—but you will need each shareholder to provide consent on the form. For more information about Form 2553, check out the two-part Nolo article on forming an S corporation.
Like a traditional corporation, an S corporation must file an annual federal tax return. However, because an S corporation is a pass-through entity, more of the information included on an S corporation’s federal tax return is for informational purposes than a traditional corporation’s tax return.
Where a traditional corporation files federal Form 1120, U.S. Corporation Income Tax Return, an S corporation files federal Form 1120S, U.S. Income Tax Return for an S Corporation. Much of the substantive information on the return reports on the S corporation’s income, deductions, and payments (such as estimated tax payments).
Form 1120S includes Schedule B, Other Information. The information required on Schedule B mainly includes:
Regarding the last item, if the corporation’s total assets at the end of the year are less than the designated amount, the corporation doesn’t need to file additional Schedules L, Balance Sheets per Books, or M-1, Reconciliation of Income (Loss) per Books With Income (Loss) per Return, with its 1120S.
S corporations also must file a summary of information regarding income, deductions, credits, and other items that pass through to the corporation’s shareholders. You provide this summary to the IRS through Schedule K,Shareholders’ Pro Rata Share Items. You include Schedule K when you file Form 1120S.
After the end of your S corporation’s tax year, the corporation must issue a Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc., to each shareholder. The corporation also must provide each shareholder with an accompanying set of Shareholder’s Instructions for Schedule K-1. Each Schedule K-1 is specific to a particular shareholder and, among other items, provides information about that shareholder’s share of the income from the S corporation for the preceding tax year. Among other things, this can include ordinary business income, income from rental real estate, dividends, and royalties. You must include copies of the Schedule K-1s issued to your shareholders with your corporation tax return.
Each shareholder will take the information from his or her Schedule K-1 and use it to complete his or her individual federal tax return.
If your S corporation has employees, it must withhold employment taxes on their wages. Moreover, as a rule, any shareholder in your S corporation who provides services to the corporation must be paid a salary. (The same goes for corporation officers regardless of whether they are also shareholders.) Shareholder-employee salaries are subject to employment taxes in the same way as the salaries of other employees. Taken together, this means that your S corporation must periodically withhold, report on, and pay employment taxes for employee and shareholder-employee wages and salaries.
As part of the payroll tax process, your corporation must periodically pay money to the federal government using electronic funds transfer. In addition, your corporation needs to file quarterly employer tax returns (Form 941). Moreover, after the end of the year, the corporation must issue each employee a Form W-2, Wage and Tax Statement, which is specific to that employee. You must file copies of the W-2s, along with a Form W-3, Transmittal of Wage and Tax Statements, with the federal government each year by the last day of February.
While S corporation profits are not taxed by the federal government, they are taxed by some states. In other states, S corporations are assessed a flat fee. In states that require S corporations to pay taxes or fees, you will need to file separate state tax returns for your S corporation. Even states that don’t assess S corporation taxes or fees often require you to at least file an informational return.
Apart from federal employment taxes, most states also collect employment taxes. To pay those taxes, you’ll need to set up a state withholding tax account for your corporation, and report on and pay the taxes using the appropriate state forms.
Check your state’s Department of Revenue (or equivalent state office) for more details on both of these state taxes. You also can find out more about state business income and employment taxes in other Nolo articles.
S corporations themselves may owe no taxes on their profits, but that doesn’t mean that handling S corporation taxes, or completing a Form 1120S along with the required schedules, is a piece of cake. On the contrary, S corporation taxes, like traditional corporation taxes, are complicated. Just consider that the most recent version of the IRS taxpayer instructions for Form 1120S runs to 47 pages. Unless you are an accountant or tax expert, you should think twice before attempting to prepare your S corporation’s tax filings on your own. Instead, strongly consider working with a knowledgeable tax professional.
For more information about S corporations, including other tax issues, check out the other articles in the S corporation section of the Nolo website. For state-specific information about business income and employment taxes, check out the various 50-state guides on the Nolo site.