Taxation Process for S Corps in Colorado
S Corps in Colorado pay taxes through individual income tax returns. S corps allow for pass-through taxation, ensuring only shareholders are taxed on company profits, not the corporation itself.
The Colorado tax return refers to the federal return, so the federal return should be completed first. S corps must distribute Schedule K-1 to every shareholder. Schedule K-1 will show each shareholder his portion of the company’s profits, deductions and credits for personal tax returns. S corps must file Form 1120S with the IRS and Colorado Form 106.
Starting an S Corp in Colorado
S corps are beneficial for business owners who take large distributions in addition to their salary. Businesses that elect S corp status will need payroll and accounting services.
There are two ways to start an S corp: By forming an LLC and electing S corp status from the IRS when requesting an EIN or by forming a corporation and electing S corp status from the IRS.
S Corp Taxation Information
Do S corporations pay taxes? S corporations are not taxed themselves. Their income passes through to shareholders who report it on individual tax returns. However, S corporations may pay state taxes depending on location. Shareholders pay self-employment tax on wages.
S corporations avoid double taxation faced by C corporations. C corporations’ income is taxed at the corporate level. Their shareholders also pay taxes on dividends. S corporations’ income passes through to owners’ personal returns. No tax imposed on S corporation directly and no dividends.
Owners of S corporations pay regular income tax on distributions but no self-employment tax. If owners are employees too, they receive salaries subject to FICA taxes.
To file for S corporation status, a business must first incorporate as a C corporation or LLC. Then it can elect S corporation status with the IRS.
S corporation owners can pay themselves through salary, distributions or both. Reasonable salaries prevent unpaid taxes and fines. Distributions avoid self-employment tax. Balance depends on owner’s role and finances.
To start S corporation payroll, owners need employer ID numbers and accounts. They must set reasonable salaries, choose pay frequency, calculate taxes and net payroll, and file payroll taxes.
S corporations pass income, credits, deductions and losses to shareholders. That gives advantages over C corporations. S corporations have 100 or fewer shareholders. Both S corporations and LLCs avoid corporate taxes as "pass-through entities."
Savings from avoiding self-employment tax on S corporation profits only apply if enough left after reasonable compensation. Example: $90,000 profit before $50,000 salary. $40,000 profit avoids that tax.
S corporations give shareholders a Schedule K-1 showing their portion of earnings to pay taxes on personal returns. Shareholders pay income tax on W-2 salary income and K-1 shareholder distribution income.
Understanding S corporation taxation important before electing status. S corporation income passes through to shareholders to avoid double taxation. Must meet IRC requirements to qualify for S corporation status.
Before S corporation election, know self-employment tax rules. Consider if flexibility and avoiding double taxation outweigh extra rules. Weigh against other structures like sole proprietorships.