Posted by Daniel P Vigilante CPA and Profit Consultants

Tax Payment for S Corporations

Tax Payment for S Corporations

Many small businesses look for ways to save money and reduce what they pay as tax, which might seem like a good idea. As a result, many consider that becoming an S corp can help them avoid double taxation that shareholders of a company experience. 

Undoubtedly, the taxation of S corp is different, and the owners need not worry about double taxation. However, it is essential to understand the tax implication of an S Corp and how they pay tax before switching your business to one.

 

What is S Corp 

An S corp is a unique form of a corporation conducted as a corporation. Still, the tax is based on the tax forms of all individual shareholders for the purpose of federal taxation. A business needs to meet the following criteria before becoming an S corp:

  • Such business needs to be a corporation

  • Should meet some specified requirement 

  • Needs to file an election form with Uncle Sam


S Corps and the Federal Income Taxes 

Uncle Sam considers an S corp a pass-through entity for tax, meaning that an S corp will have its taxes passed through to all owners for the purpose of federal taxation. 

  • The corporation needs to submit their business tax return using Form 1120-S

  • Schedule K-1 will be used to record the share of the loss or profit for each shareholder

  • Using Schedule E of the income tax return for each individual, they will record the K-1 info for all shareholders. 

Many states employ federal information for the determination of the entire income for state tax.


Taxation of S Corporations 

Tax payment of S corps by the owner is a function of each owner's distributive share, and such taxes are recorded on Form 1040. For instance, if the S corp made a profit of #200,000 and had five shareholders, each having a 1/5 share, they will pay taxes on their profit of $40,000.


Unique Tax Deduction for S Corp Owners 

All pass-through businesses can take a (QBI) Qualified business Income Deduction which allows them to deduct as much as 20% of their income provided they meet other qualifications. They can take this deduction in addition to the deduction they do have for their business expense which helps them bring down their tax. 

This deduction will be removed from the tax return of the owner, not the business.


S Corps do not Face the Double Taxation Issue. 

Many firms have an issue with C corporations in which the business's net income will be taxed, and the shareholders will also pay tax on dividends. The income tax for an S corporation is paid via the owner using the personal tax return. There are no dividends, so they need not deal with taxes.


Owners of S Corporations and Taxes

All S Corp owners need regular payment of income tax for their distribution. Since they are not classified as self-employed, they need not pay self-employment tax on such distribution.

Should any of the owners be employed, they get a salary that will require withholding FICA  (Social Security and Medicare tax)taxes.

Several owners of S corps work in their businesses, and many avoid tax payment by refusing payment to such employees. Uncle Sam keeps a close watch to ensure that such people get reasonable payment as compensation and the payment of Medicare and Social Security on such income.

 

Further Taxes the S Corps do Pay 

Like other businesses, the S corporations also pay taxes.

For instance, an S corp needs to pay employment taxes on employees' wages, and they need to withhold and report both state and federal taxes, payment and report of FICA (Medicare and Social Security) taxes, and unemployment taxes. Such an S Corp will also have to pay property taxes if they own a building or real estate. 

The S corps will need to pay excise and sales taxes as other businesses do. You should get more information by checking with your state revenue department. 

You might also have to pay state income taxes, franchise taxes, gross income taxes for your S corp every year. The state revenue department where you operate will have more information for you.


FOR MORE INFORMATION ON HOW DANIEL P VIGILANTE, CPA & PROFIT CONSULTANTS CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.

Daniel P Vigilante CPA and Profit Consultants
Contact Member