Do S Corporations Pay Estimated Taxes?

An S corporation is a business entity that elects a specific tax status with the Internal Revenue Service (IRS). This election allows the entity to avoid the double taxation that typically applies to C corporations, where profits are taxed at the corporate level and again when distributed to shareholders. S corporations offer the limited liability protections of a corporation with a distinct tax treatment.

S Corporation Tax Status

S corporations do not pay federal income tax. They operate as “pass-through” entities for tax purposes. The corporation’s income, losses, deductions, and credits are passed through directly to its shareholders. This means the tax liability shifts from the corporation to the individual shareholders. Shareholders then report their share of the business’s financial items on their personal tax returns. Therefore, the S corporation does not make estimated income tax payments on its ordinary business profits.

Shareholder Estimated Tax Obligations

S corporation shareholders are responsible for paying estimated taxes because the corporation’s income, including ordinary business income, capital gains, and qualified dividends, flows directly to their personal tax returns. This income is reported on IRS Form 1040, the U.S. Individual Income Tax Return. Shareholders must account for this income when calculating their individual tax liability.

Estimated taxes are required for individuals who expect to owe at least $1,000 in tax for the year. This threshold applies to income not subject to withholding, such as income from an S corporation. The IRS operates on a “pay-as-you-go” system, meaning taxes should be paid as income is earned.

Shareholders must ensure their tax payments, whether through withholding from other income sources or estimated tax payments, meet requirements to avoid penalties. These requirements involve paying at least 90% of the tax for the current year or 100% of the tax shown on the prior year’s return. For high-income taxpayers with an adjusted gross income of $150,000 or more in the prior year, the safe harbor increases to 110% of the prior year’s tax liability.

Calculating Individual Estimated Taxes

S corporation shareholders calculate their individual estimated tax payments using IRS Form 1040-ES. This form includes a worksheet to estimate gross income, deductions, and credits for the year. The estimated income from the S corporation forms part of this calculation.

Information for this calculation comes from the S corporation’s Schedule K-1. This form details the shareholder’s share of the corporation’s income, losses, deductions, and credits. Shareholders use this information to accurately project their individual tax liability.

Common methods for estimating income include using the prior year’s tax as a guide or annualizing income. The prior year’s tax method involves making estimated payments that collectively equal the total tax owed in the previous year. Annualizing income is suitable for those with fluctuating income, where tax liability is estimated at the end of each quarter based on income and deductions earned up to that point.

Making Estimated Tax Payments

S corporation shareholders have several methods for submitting estimated tax payments to the IRS. Electronic payment options include IRS Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or payment via the IRS2Go app. These platforms allow for immediate payments or scheduling payments in advance.

Payments can also be made by mail using a payment voucher from Form 1040-ES, accompanied by a check or money order. Cash payments are accepted through certain IRS retail partners. Payments must be submitted by the specified deadlines.

Estimated tax payments are due quarterly:
April 15 for income earned January 1 to March 31.
June 15 for income earned April 1 to May 31.
September 15 for income earned June 1 to August 31.
January 15 of the following year for income earned September 1 to December 31.
If a due date falls on a weekend or legal holiday, the deadline shifts to the next business day.

Specific Corporate-Level Taxes

While S corporations avoid federal income tax, the entity may be subject to certain taxes, potentially requiring estimated payments from the S corporation. One instance is the Built-in Gains (BIG) tax. This tax applies when a C corporation converts to an S corporation and then sells appreciated assets within a five-year recognition period following the conversion.

Another corporate-level tax is the Excess Net Passive Income (ENPI) tax. This tax is imposed if an S corporation has accumulated earnings and profits from a prior C corporation history and its passive investment income exceeds 25% of its gross receipts. Passive investment income includes royalties, rents, dividends, interest, and annuities. The ENPI tax is calculated at the highest corporate tax rate.