How to File S Corp Taxes
Last Updated: By TRUiC Team
If you’re thinking about starting an S corporation (S corp) or recently elected S corp status for your business, you probably have lots of questions about how S corp taxation works and how to file S corp taxes.
This article will cover everything you need to know about filing S corp taxes, including:
S corp taxes can be complex, so we strongly recommend you consider speaking with a tax professional before filing your taxes. Schedule a free consultation with an accountant to help ensure your financials are in order.
How Do S Corp Taxes Work?
An S corp is a tax designation a limited liability company (LLC) or corporation can elect, which may result in tax savings. The profits and losses of an S corporation pass through to the owners in two different ways:
- Reasonable Salary
Unlike salaries, distributions aren’t subject to self-employment taxes. That means the potential tax savings on distributions can allow an S corp to reduce its tax burden when compared to a default LLC or C corp.
S corporations benefit from pass-through taxation, which means their profits and losses pass through to their shareholders without the business paying tax on those gains. As a result, the Internal Revenue Service (IRS) taxes an S corp's profits and losses at the individual vs. corporate level.
Paying Yourself Through Your S Corp
The IRS considers S corp owners as employees of the business. Thus, S corp owners must pay themselves a reasonable salary for the services they perform for the company. At the end of the year, all remaining profits from the business then pass through to the owners as distributions.
The IRS requires S corps to provide adequate compensation to any and all shareholders who perform any work for the company “in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee.”
That means S corp owners must pay themselves a salary equal to the market rate for the work they provide the company before the S corp pays dividends or non-wage distributions.
Reasonable Salary Taxes
These reasonable salaries are subject to both self-employment taxes and income taxes. Information regarding your salary will appear on your Form W-2, which you’ll need to report on your individual tax return.
S corp owners can, in addition to receiving a salary, take a portion of the company’s income in the form of dividends and distributions. These dividends and distributions are the S corp’s remaining profits distributed to its shareholders.
The distribution of dividends and other payments is subject to a number of rules and regulations. For S corps, any shareholders who serve as employees of the business must pay themselves a reasonable wage or salary “before non-wage distributions may be made to the shareholder-employee.” This includes paying officers, directors, and managers.
If an S corp has any earnings or excess profits after paying its shareholder-employees reasonable compensation, only then may its owners or board of directors approve and pay dividends and distributions to themselves and other shareholders.
Distributions are subject to income taxes but not self-employment taxes. The lack of self-employment taxes on distributions makes electing S corp status a lucrative option for many business owners. Your Schedule K-1 will dictate how to allocate distributions, and those who receive distributions must report that on Schedule E of their personal income tax return.
Here’s an example of what S corp taxes may look like for an S with $100,000 in profits:
Filing S Corp Taxes
S corporations have a number of tax-filing requirements.
First, nearly all S corps are employers because the IRS requires S corp owners to pay themselves a salary for any work they do for the company. That means an S corp must file employer taxes.
S corps may be pass-through entities for tax purposes. So, although S corps aren’t taxed at the corporate level, they’re required to file informational returns with the IRS to report their business income, expenses, deductions, credits, and how they allocated their profits and losses to shareholders.
In addition, S corp owners must report their salaries and wages from the company — as well as their share of the distribution of the company’s profits — on their personal tax returns.
Step-by-Step Instructions for Filing S Corp Taxes
The key steps involved in preparing and filing your S corp taxes include:
- Track Your Income and Expenses and Prepare Your Financial Statements
- File Your Employer’s Quarterly Federal Tax Returns
- File Your Federal Unemployment Tax Return
- Use Form W-2 to Report Employee Wages and Salaries
- Use Schedule K-1 (Form 1120S) to Report to S Corp Shareholders
- File Your S Corp Taxes
- Report Wages and Distributions on S Corp Shareholders’ Personal Taxes
Step 1: Track Your Income and Expenses and Prepare Your Financial Statements
You'll need to track your S corporation’s income and expenses and record all transactions in its accounting ledger. You’ll then use this ledger to prepare your S corp’s financial statements and taxes.
Recommended: Check out our review of the best accounting software to find the right fit for your S corp’s specific needs.
Step 2: File Your Employer’s Quarterly Federal Tax Returns
As an S corp, you’ll have at least one employee — even if you’re the only one. All employers must withhold and remit the employee portions as well as remit the employer’s portion of an employee's Social Security, Medicare, and personal income taxes on a quarterly basis.
To file your quarterly employer’s taxes, you’ll need to submit a completed Form 941 to the IRS and pay all taxes due.
Step 3: File Your Federal Unemployment Tax Return
In addition to your employer’s quarterly taxes, employers must file and pay a Federal Unemployment Tax (FUTA). The IRS uses this tax money to provide funds for federal unemployment compensation insurance and to supplement state unemployment insurance and tax systems.
To file your FUTA return, complete and submit Form 940 to the IRS and pay all taxes due.
Step 4: Use Form W-2 to Report Employee Wages and Salaries
Employers also must report their employees’ wages and salaries — as well as withholdings and taxes — to the IRS and their employees after the end of each year.
To report employee wages and salaries, employers must use the corresponding copies of Form W-2. Form W-2 is produced with six copies:
- Copy A goes to the Social Security Administration.
- Copies B, C, 1, and 2 go to the employee to file with their federal tax return, to keep for their own records, and to file with their state and local returns, respectively.
- Copy D remains with the employer for their own records.
Step 5: Use Schedule K-1 (Form 1120S) to Report to S Corp Shareholders
S corps also must report each shareholder’s allocation of the business’s income, deductions, and credits to the IRS and their shareholders.
To report their shareholders’ allocations of the company’s profits and losses, S corps must file Schedule K-1 (Form 1120S) for each shareholder with the IRS as well as send a copy to each shareholder.
Step 6: File Your S Corp Taxes
S corps also must complete and file an informational tax return with the IRS. This return reports an S corporation’s income, deductions, shareholders, profits and losses, and how it allocated those profits and losses to its shareholders.
To file your S corp tax return, complete and submit Form 1120S — along with all corresponding forms and schedules (including Schedule K-1 as noted above) — to the IRS.
Step 7: Report Wages and Distributions on S Corp Shareholders’ Personal Taxes
The owners of an S corporation will then need to report their income and profits from the business on their personal income tax returns, using the information provided by the S corp.
S corp owners who are shareholder employees will report any wages, salaries, and bonuses paid by their company (as reported on Form W-2) as income on their personal tax return, using Form 1040.
S corp owners also are responsible for reporting their allocation of their business’s profits and losses (as indicated on Schedule K-1) and paying personal income tax on any dividends or distributions allocated to them (as indicated on Schedule E) on their personal income tax returns (Form 1040).
Filing S corp taxes can be an extensive process. Although you may be able to do this on your own, we recommend making a free consultation with an accountant to ensure you file all of your tax information correctly.
S Corp Tax Forms
S corporations must file a number of tax forms. While the exact forms you need to file will depend on the nature of your business’s income, expenses, deductions, and credits, here are the most common tax forms filed by S corps:
Form 940: Employer’s Annual Federal Unemployment Tax (FUTA) Return
The IRS requires all employers to pay the federal unemployment tax, and most states also require them to pay unemployment taxes of their own. As part of a larger network of state unemployment insurance taxes, FUTA funds help to pay benefits to people who lose their jobs. This is done using Form 940.
Form 941: Employer’s Quarterly Federal Tax Return
All employers must file Form 941 to report the income and payroll taxes they withheld from their employees' earnings in a given tax year. This form also reports on the employer's share of Social Security and Medicare taxes.
Form W-2: Wage and Tax Statement
Used to report employee wages to individual employees and the IRS, Form W-2 details an employee’s annual earnings as well as the taxes deducted from those wages at the end of the calendar year.
Form 1120S: US Income Tax Return for an S Corporation
S corporations use Form 1120S to report their profits and losses to the IRS, including their income, expenses, deductions, and credits applicable to the company in a given tax year.
Schedule K-1 (Form 1120S): Shareholder’s Share of Income, Deductions, Credits, etc.)
Corporations use Schedule K-1 to report each shareholder’s allocation of the company’s income, expenses, deductions, and credits. S corps must create a Schedule K-1 for each shareholder and send the corresponding copies to each shareholder and the IRS.
Form 1040, US Individual Income Tax Return
Individuals use Form 1040 to file their annual personal income tax returns, which report on an individual’s or couple’s income, deductions, credits, tax payments, and other financial information to the IRS. Depending on an individual’s unique tax situation, they may need to provide more details about certain elements of their Form 1040 on a variety of forms and schedules.
Schedule E (Form 1040), Supplemental Income and Loss
Individuals use Schedule E to detail their supplemental income and losses on their personal tax returns. It includes a section to report income from partnerships and S corps.
Schedule D (Form 1040), Capital Gains and Losses
Individuals use Schedule D to report any capital gains and losses on their individual income tax return. This includes capital gains or losses from partnerships and S corps.
S corporation taxes can be complicated — especially for a new S corp. We recommend consulting with an accountant or a tax professional like 1-800Accountant for help ensuring you and your S corp remain compliant with all applicable taxes.