An S Corporation has profits and losses passed directly to owners. Owners pay income tax on salary and distributions. No corporate tax. C Corps pay corporate tax. Income is taxed again as dividends to shareholders. Double taxation is avoided with S Corps.
Requirements for S Corp Status
- Must be incorporated domestically with one stock class.
- Can’t have over 100 shareholders.
- Owners must be citizens or permanent residents.
Taxation Benefits of S Corps
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. However, each owner who also works as an employee must be paid a “reasonable” amount of compensation (e.g., salary).
Essentially, an S corp is any business that chooses to pass corporate income, losses, deductions, and credit through shareholders for federal tax purposes, with the benefit of limited liability and relief from “double taxation.”
S Corp Tax Filing
- 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.
Taxation Rates for S Corps
S corp income passes through to owners. They pay based on personal rates up to 37%. Double taxation is avoided as C Corps pay 21% corporate tax, and dividends are taxed again at the shareholder level. S corps distribute profits to stockholders and are exempt from federal tax on earnings.