An S corporation is a special corporation named after a section of the Internal Revenue Code. It pays no taxes. However, payments to officers may count as wages for taxes. Most S corps have just one owner. Individuals can make a sole proprietorship into an S corp. The owner then pays himself a salary as an employee. Any extra profits can go to the owner as distributions, not salary.
Tax Reporting and Obligations
S corporations don’t pay taxes themselves. Instead, shareholders report profits and losses on personal returns, thus avoiding double taxation. If you choose S Corp status, you will need to file additional end of year tax forms, including Form 1120S, which is the S Corp income tax return.
Operational Requirements
By default, your new corporation will be designated a C corp. Once you’ve met the requirements for an S corp, you can fill out the necessary paperwork to gain S corporation status.
Both S Corporations and single-member LLCs can be taxed as pass-through entities. One of the biggest differences is that S Corps require considerably more paperwork.
When you own a business, you have to pay the employer’s portion of the taxes yourself. But when you work as an employee of your very own S Corp, not all of your business’s earnings have to be subjected to self-employment tax.
An S corp is a tax designation that allows a company’s profits to pass through to the owners’ personal tax returns. Both corporations and limited liability companies (LLCs) can choose to be taxed as an S corp. Because of the benefits of S Corp taxes and limited liability, choosing this business structure is an attractive option for many business owners. If you own an S Corp, you can receive both wages and distributions. A salary is subject to payroll taxes, while distributions are not.