How Do You File Taxes for an S Corporation?

An S corporation, or S corp, is a federal tax election allowing a business to pass its income, losses, deductions, and credits directly to its shareholders for federal tax purposes. This pass-through taxation means the S corporation generally avoids corporate-level income tax, distinguishing it from C corporations which can face double taxation. Shareholders report their share of the S corp’s income and losses on their personal tax returns, where it is taxed at individual rates. Filing taxes for an S corporation involves specific federal and often state-level requirements.

Gathering Required Information and Documents

Preparing an S corporation’s tax return requires collecting various financial records. Businesses need complete financial statements for the tax year, including a detailed Profit & Loss (Income Statement) and a Balance Sheet. These statements provide an overview of the company’s revenues, expenses, assets, liabilities, and equity, which are used to populate tax forms.

Payroll information is also needed, encompassing total wages paid to all employees, including officer-shareholders who must receive a reasonable salary. This includes data from Forms W-2 and summaries from federal payroll tax filings, such as quarterly Forms 941 and annual Form 940.

Detailed information about all shareholders is necessary for S corporation tax filings. This includes their names, addresses, and taxpayer identification numbers (SSNs or EINs). The percentage of ownership for each shareholder and any changes during the tax year must be documented, as these dictate the allocation of income and losses. Records of shareholder stock and debt basis are important, tracking initial capital contributions, subsequent distributions, and the impact of prior year income or loss.

Information regarding business assets acquired or disposed of during the year is needed for calculating depreciation and potential gains or losses. This includes the asset’s cost, acquisition date, sale date, and sales price, enabling the accurate completion of depreciation schedules and forms related to asset sales. Prior year federal and state S corporation tax returns are beneficial for historical data and carryovers. All business deductions claimed must be supported by thorough documentation, including receipts and invoices.

Completing Federal Tax Forms

Form 1120-S, U.S. Income Tax Return for an S Corporation, is the primary federal income tax return. It reports the corporation’s financial activity, including gross receipts, cost of goods sold, and various deductions. Gross receipts or sales are reported from the income statement. The cost of goods sold, if applicable, is then deducted to arrive at gross profit.

The form requires reporting business deductions, such as salaries, rent, repairs, maintenance, and depreciation. Depreciation, calculated using Form 4562, accounts for asset wear and tear. After deducting all allowable expenses, the form determines the ordinary business income or loss, which flows through to the shareholders.

A separate Schedule K-1 (Form 1120-S) must be prepared for each shareholder. This schedule details each shareholder’s proportional share of the S corporation’s ordinary business income or loss, as well as separately stated income, deductions, credits, and distributions. Shareholders then use this data to report their share of the S corporation’s financial results on their personal income tax returns (Form 1040).

Other federal forms may be required depending on the S corporation’s specific activities. For instance, if the S corporation sold business property, Form 4797 might be necessary. Form 4562 is used for depreciation and amortization deductions. The comprehensive instructions for Form 1120-S provide a complete list of required attachments.

Submitting Federal Tax Returns

Once federal S corporation tax forms are accurately completed, they are submitted to the IRS. For calendar year S corporations, the filing deadline for Form 1120-S is March 15. If this date falls on a weekend or holiday, the deadline shifts to the next business day. Businesses needing more time can file Form 7004 for an automatic six-month extension.

Electronic filing (e-filing) is the preferred submission method for Form 1120-S. E-filing offers benefits such as faster processing and immediate confirmation of receipt. Most tax software providers and tax professionals offer e-filing services.

For those who choose to mail a paper return, the correct IRS mailing address depends on the S corporation’s location. These specific addresses are provided in the instructions for Form 1120-S. It is advisable to use a traceable mail service to ensure proof of timely delivery.

S corporations may be subject to certain entity-level taxes, such as built-in gains tax or excess net passive income tax, under specific circumstances. If any such tax is due, payments can be made electronically through the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay, or by mail with a check or money order. Shareholders are responsible for paying income tax on their allocated share of the S corporation’s income on their personal returns. Retain copies of the completed Form 1120-S, all attached schedules, and supporting documentation for at least three years from the filing date or the date the tax was paid, whichever is later.

Addressing Other Tax Responsibilities

S corporations have several other tax responsibilities beyond the annual federal income tax return. State income or franchise taxes are a significant consideration, as S corporations are subject to state-level taxation, which varies considerably across jurisdictions. While many states recognize the federal S corporation election and tax shareholders directly, some states may impose entity-level taxes, such as minimum taxes or taxes on gross receipts. Businesses must comply with specific state requirements, which may include filing separate state S corporation tax returns.

Payroll taxes are another obligation for S corporations with employees, including officer-shareholders who must be paid a reasonable salary. Federal payroll taxes include Social Security and Medicare taxes (FICA) and federal unemployment tax (FUTA). S corporations withhold the employee’s share of FICA taxes and remit both employer and employee portions to the IRS. Quarterly Form 941 filings report withheld income tax, Social Security, and Medicare taxes. Annually, Form 940 is filed for FUTA tax. Forms W-2 must be issued to employees, and Form W-3 filed with the Social Security Administration.

Estimated taxes are often required throughout the year to cover the tax liability of both the S corporation (for any entity-level taxes) and its shareholders. Federal estimated income taxes for individuals are typically paid in four equal installments: April 15, June 15, September 15, and January 15 of the following year. Shareholders are responsible for making their own estimated tax payments to avoid underpayment penalties.

If the S corporation sells tangible goods or certain services, it may be responsible for collecting and remitting sales and use taxes to the appropriate state and local tax authorities. Sales tax is generally collected from customers at the point of sale and then remitted to the state on a regular basis. Businesses must register with the state’s tax department to obtain a sales tax permit and understand the specific rules regarding taxable goods and services in their jurisdiction.