Do S Corps Have to Pay Quarterly Taxes?
Understand your S Corporation's ongoing income tax obligations and how owners manage their personal payment responsibilities.
An S corporation serves as a distinct legal entity that offers specific tax advantages, primarily by allowing business profits and losses to be passed directly to the owners’ personal income. This structure aims to prevent the double taxation that can occur with traditional corporations. The general purpose of an S corporation is to combine the liability protection typically associated with a corporation with the tax benefits of a pass-through entity, such as a partnership or sole proprietorship.
Understanding S Corporation Taxation
An S corporation generally does not pay federal income tax. Instead, it operates as a “pass-through” entity, meaning the company’s income, losses, deductions, and credits are passed directly to the shareholders. Shareholders then report these items on their individual tax returns, and any tax due is paid at the personal level. This avoids the double taxation characteristic of C corporations.
While federal income tax is not levied at the S corporation level, the entity may still be responsible for other taxes. These can include payroll taxes for employees, including owner-employees, and state-level taxes, as state laws can differ from federal rules.
Shareholder Estimated Tax Obligations
S corporation income passes through to shareholders, making them personally responsible for paying taxes on that income. This means shareholders often need to make estimated tax payments throughout the year. Estimated taxes cover their tax liability on S corporation profits and any other income not subject to withholding. The U.S. tax system requires taxpayers to pay income tax as they earn it.
Individuals, including S corporation shareholders, must make estimated tax payments if they expect to owe at least $1,000 in tax when filing their return. This threshold applies after accounting for any withholding and refundable credits. Penalties may apply if insufficient tax is paid throughout the year.
Calculating Shareholder Estimated Taxes
Calculating estimated tax payments involves considering all income sources, not just S corporation pass-through income. This includes wages, interest, dividends, and other taxable earnings, along with applicable deductions and credits. A common method for estimating tax liability is to use the prior year’s tax return as a guide. This involves taking the total tax owed in the previous year, adjusting for income levels, and dividing that amount by four for quarterly payments.
For individuals with fluctuating income, the annualized income installment method can be beneficial. This method allows taxpayers to adjust payments to match their cash flow throughout the year, potentially reducing or eliminating underpayment penalties. The calculation accounts for income earned in specific periods, rather than assuming an even distribution. S corporation owner-employees should pay themselves a reasonable salary, as this portion is subject to payroll taxes, while profit distributions are not.
Making Estimated Tax Payments
Estimated tax payments for individuals are due on specific dates throughout the year, not evenly spaced in three-month intervals. Due dates are April 15, June 15, September 15, and January 15 of the following year. If any date falls on a weekend or legal holiday, the deadline shifts to the next business day.
Shareholders have several options for making these payments. The IRS offers online payment methods such as IRS Direct Pay and the Electronic Federal Tax Payment System (EFTPS). EFTPS allows users to schedule payments up to 365 days in advance and manage their payment history. Payments can also be made by mail using Form 1040-ES payment vouchers, or through various tax software programs.
Addressing Underpayment
Failing to pay enough estimated tax throughout the year can result in an underpayment penalty. This penalty is calculated based on the underpayment amount, the period it was underpaid, and the IRS’s quarterly interest rates. To avoid this penalty, shareholders can use “safe harbor” rules.
One common safe harbor is to pay at least 90% of the current year’s tax liability through withholding and estimated payments. Alternatively, taxpayers can avoid a penalty by paying 100% of the tax shown on their prior year’s return. For high-income taxpayers (AGI over $150,000 in the prior year), this safe harbor requires paying 110% of the previous year’s tax. IRS Form 2210 is used to determine if a penalty is owed and to calculate the amount.