Friday, November 27, 2015
What Is An S-Corporation?
If you are starting a business, there are several different ways you can form your business entity. There are various advantages and disadvantages that come with each option. This article will discuss what an S-Corporation is and the types of taxes it pays.
What Is An S-Corporation?
An S-corporation is an entity that functions like a c-corporation but is taxed as a pass-through entity. This means that it is not subject to double taxation; the taxes “pass through” the entity and go straight to the shareholders’ personal tax returns. Other than this difference, an S-corporation functions in the same way as C-corporations.
Federal Income Taxes
At the federal level, the S-corporation does not pay any income taxes. Any taxes that the corporation owes are passed on to the shareholders based on their distributive share of ownership. They are then reported on their 1040 form.
If there are ten shareholders that each have a 1/10 share in a corporation whose profits are $100,000, then each shareholder would pay taxes on $10,000. Here is a breakdown of the way this is done:
• The corporation files a corporate tax return using form 1120S
• Each stockholder’s share is recorded on a Schedule K-1
• The information recorded on the Schedule K-1 is reported on line 17 of each stockholders’ 1040 form.
The owners of a corporation are known as shareholders or stockholders. Typically, they receive dividends from the corporation as a return on their investment. If the stockholder is not an employee of the corporation, then they are subject to self-employment taxes. If the stockholder is an employee of the corporation, then they are not considered self-employed. They will have to have the corporation withhold any applicable federal and state taxes from their income.
All corporations must pay employment taxes. This includes withholding and reporting income taxes at the state and federal level. The corporation must also pay and report FICA taxes as well as worker’s compensation and unemployment taxes.
If the corporation owns any type of real estate, they will be subject to paying property taxes. Any applicable federal and state tax laws will apply.
State Sales, Excise, and Franchise Taxes
Corporations are also required to pay state sales taxes and excise taxes just as other entity types. You will need to check with your state’s department of revenue to find out exactly how this works in your particular state.
While there are other factors that should figure into your decision to form your business as an S-corporation, being familiar with how taxes work with your business structure is very important. Consult with a CPA to find out whether an S-corporation status is right for your business.