S Corp Taxes and Accounting
What is an S Corporation
An S Corporation is a tax election that a business can make. The S corporation has an obligation to file an annual information return with the IRS. S Corporation generally use a calendar year end for reporting purposes. The S Corp files Form 1120S. This return is due March 15 and can be extended until September 15.
How a Business Elects to be Taxed as a S Corporation
A C corporation or a limited liability company can elect to be taxed as an S Corporation. They can do so by filing Form 2553 within 75 days into the business tax year. Generally that would be March 15. Once the IRS approve the designation the election is perpetual.
S Corp Taxes
The S Corp files a Form 1120S annually. It does not pay federal income taxes. The income in the entity is taxed as the member or shareholder level. The owners receive what is called a Schedule K-1. The K-1 reports their share of the income based on their ownership percentage. Profits are subject to tax. The profits in the S Corp are not subject to SE Tax, or FICA. The profits do not need to be distributed in order for them to be subject to income tax.
Taking Wage in an S Corporation
Because profits in the S corp are not subject to SE Tax or FICA tax it is important that any active participant in a S Corporation take some sore of “reasonable salary”. This salary would come in the form of a W-2 wage. The IRS however does not define what it means by “reasonable salary“. A good tax accountant can help you make that determination.
Distributions of Profits
Owners of an S Corporation are allowed to take profit distributions. While there can be some complexities when it comes to these distributions, generally speaking the distribution is not subject to income tax for the owners. That is because as discussed above the owner pays tax on the profits regardless of whether the owner actually receives any of the profits. This can be a down side for some. It is possible in a S corp that company has high profits but decides not to distribute those profits. The owner is still liable for the tax on that income.