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S-Corporation Tax Filing: What You Need to Know


Updated: March 28, 2024

S corporation status is a special tax designation available to business owners. It allows the company to pay its shareholder-owners like any other employee, but with certain tax breaks.
It means that while the company itself doesn’t pay corporate tax, shareholders must still pay personal income tax on their share of the profits.

How are S Corps Taxed?

When an S Corporation is set up, you must file a special form with the IRS known as Form 2553. This document is used to elect the S Corporation tax status and informs the IRS that the company wants to become a ‘pass-through’ entity.
This means that any profits pass through the company to shareholders, who are then subject to personal income tax. It allows shareholders to avoid double taxation (by both the company and shareholders). In addition, the company is not subject to corporate taxes or certain additional forms of taxation.
These corporations don’t need to pay federal corporate income taxes on profits, but do need to file an informational return (Form 1120S) with the IRS every year. This form reports the company’s income, expenses, and other information.

How to Elect for S Corp Tax Status?

To elect for S Corporation tax status, the company must submit a completed Form 2553 to the Internal Revenue Service. Only companies with an LLC or C corporation status are eligible to elect for S Corporation status.
All shareholders need to sign and date the form and must be U.S. citizens or resident foreigners with valid Social Security numbers. The company also needs to provide evidence that they meet the requirements of an S corporation.

When Does the S-Corp Tax Return Need to be Filed?

Once a company has opted for S Corporation status, it must file its tax return every year. The deadline for filing Form 1120S is March 15, if the company is on a calendar year.

If the company is in a fiscal year, it must file its tax return by the 15th day of the third month following the end of the fiscal year. Companies that fail to file a return before the due date are subject to penalties and interest.

You can either file your tax return electronically or by mail. You can also apply for a 6-month extension by using Form 7004. This form will help you avoid late filing penalties.

Is It a Good Idea to Elect for S Corps?

S corporations are an excellent option for small businesses that want to reduce their overall tax rate. They also provide benefits such as protection of personal assets from creditors, lower audit risk from the IRS, and ease of passing business ownership to new shareholders. Some of the critical benefits of S Corps are:

  • Enterprises don’t need to pay double tax as profits go directly to the shareholders.
  • The maximum number of shareholders for an S Corp is 100, which makes it ideal for small businesses.
  • Shareholders can deduct their share of losses from their personal taxes.
  • S Corps are not subject to certain forms of taxation, such as the Alternative Minimum Tax.

For these reasons, electing for S Corp status can be a smart move for many businesses. However, it is essential to consult with a qualified tax professional to make sure it is the right decision for you.

Wrapping Up!

S Corporation status provides some unique tax benefits to business owners. However, it’s important to understand that shareholders need to pay personal income tax on their share of the company’s profits. Companies must also file a form with the IRS annually and meet other requirements to maintain their S Corporation status.
Failure to comply with IRS regulations may result in penalties and interest. Therefore, it’s important to ensure you understand all the necessary rules and regulations before electing for S Corporation status.

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