How S Corporations Pay Taxes

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You may have been advised that you can become an S corporation and save the "double taxation" problem of being a shareholder in a corporation. Yes, an S corporation is taxed differently than a corporation, and S corporation owners don't have a double tax problem, but before deciding to choose S status you should understand how an S corporation pays income taxes. - and other taxes.

What is an S Corporation?

An S Corporation (S Corp) is a special type of corporation that acts like a corporation but is taxed on each shareholder's tax form for federal income tax purposes.

How does an S-society pay federal income taxes?

For tax purposes, an S corporation is used as the flow control mechanism. That is, the tax on the corporation is passed on to the owners for federal income tax purposes, but not to the corporation itself. In all other respects, an S corporation functions just like a corporation.

  • First, the company will file a corporate tax return on Form 1120S.
  • Then each shareholder's share of the company's profit or loss is recorded in Appendix K-1.
  • The K-1 information for each shareholder is provided on line 17 of the shareholder's Form 1040.

Most states use the federal data to determine total income for state tax assessment.

How are S Corporation owners taxed?

The owners of the S corp pay income taxes based on their distributive ownership interest, and these taxes are reported on their individual Form 1040. For example, if the corp's profits are $ 100,000 and there are four shareholders each with a 1/4 stake, each shareholder would pay tax on $ 25,000 in profits.

How does an S Corporation avoid the double taxation problem?

As noted above, in addition to the income tax that is imposed on the company itself, the shareholders of companies pay tax on the dividends they receive from the company. In an S corp, society is not subject to tax and there are no dividends.

Do S Corporation Owners Pay Self-Employed Taxes?

The owners of a corporation are shareholders and receive dividends as the return on their investment.
The owners of an S corporation pay regular income tax on their distribution, but they are not considered self-employed, so they do not pay self-employment tax on that distribution.

If either owner is also an employee, they receive a salary from which FICA taxes ({Social Security and Medicare Tax) are withheld. So there is no self-employment tax levied on this S Corp holder.

Other taxes paid by S Corporations

S Corporation pays the same taxes as other companies, including:

Employment taxes
An S Corporation must pay employment taxes on wages, including withholding and state income taxes, payment and reporting of FICA (Social Security and Medicare) taxes, indemnity taxes, and unemployment taxes.

Property taxes
If the S Corporation owns a building or other property, property taxes must be paid on that property.

State sales, excise and franchise taxes
S companies are required to pay state sales taxes and excise taxes in the same way as other types of business. Check with your state tax authority for more information on sales and consumption taxes.

Franchise Taxes / State Income Taxes / Gross Income Taxes
Some states levy franchise taxes, state income taxes, or gross income taxes on suburban corporations each year. Check with your state tax authority to see if your state charges these taxes.