An S corporation (S Corp) is not taxed at the business level because it is a pass-through tax status for federal, state, and local income taxes. The S corp income passes through to the owner’s individual tax return as salary and distributions. The owner’s salary pays employment taxes and income tax, while distributions only pay income tax at the shareholder level, which leads to S corp tax savings.
The main difference between an S corp and a C corp is how each is taxed: Profits from a C corp are taxed to the corporation when earned, then taxed to the shareholders when distributed as dividends, creating a double tax. An S corp may pass income directly to shareholders without having to pay federal corporate taxes.
Of course, each state has its own rules regarding S-corp taxation. Some states tax the S-corp directly. For instance, in Illinois, S-corporations pay a 1.5% tax on the S-corp’s Illinois income. This tax is in addition to the income tax that shareholders pay on their share of the S-corp’s income.
While these tax advantages might make S corporation status attractive, S corps aren’t treated equally by each state. For instance, some states choose to follow the federal tax requirements for S corps, while states like New Hampshire, Tennessee and Texas ignore S corporation status and tax those companies as C corporations.
An S corporation (S Corp) is not taxed at the business level because it is a pass-through tax status for federal, state, and local income taxes. The S corp income passes through to the owner’s individual tax return as salary and distributions. The owner’s salary pays employment taxes and income tax, while distributions only pay income tax at the shareholder level, which leads to S corp tax savings.