Owners pay taxes on personal returns, usually at lower personal rates. This avoids double taxation on corporate income. An S Corporation has profits and losses passed directly to owners.
To be an S Corp, meet IRS rules. Must be incorporated domestically with one stock class. Can’t have over 100 shareholders. Owners must be citizens or permanent residents.
Taxation Comparison: S Corp vs C Corp
C Corps pay corporate tax. Income is taxed again as dividends to shareholders. Double taxation is avoided with S Corps.
Benefits and Process of S Corporation Taxation
The S corporation is the only business tax status that lets you save on Social Security and Medicare taxes while avoiding double taxation. By default, an LLC pays taxes as a sole proprietorship, which includes self-employment tax on your total profits. S Corps are a unique business tax structure that changes the way your business revenue is taxed.
Important Details about S Corporation Taxation
The big benefit of S-corp taxation is that S-corporation shareholders do not have to pay self-employment tax on their share of the business’s profits. The big catch is that before there can be any profits, each owner who also works as an employee must be paid a “reasonable” amount of compensation (e.g., salary).
Reporting and Compliance for S Corporations
S corps complete Form 1120S for taxes. Must include general business info, EIN, financial statements. Must report contractor payments over $600. Shareholders then report S corp income on personal returns.