An S Corporation is a business entity that functions as a corporation but is not taxed as an individual entity. S Corporations are able to avoid double taxation because they are not required to pay corporate income taxes on their profits. Instead, much like a sole proprietorship or a partnership, each shareholder reports the profits or losses of the business on their personal income tax return. However, unlike a sole proprietorship or a partnership, an S Corporation has liability independent from the owners/ shareholders.
The specifics of S Corporation tax:
- Although an S Corporation does not pay income tax as an entity, it is required to file a corporate tax return using IRS Form 1120S.
- The shareholders of an S Corporation must pay themselves reasonable compensation for their work and must pay taxes on this income.
- Each shareholder is required to report their share of the profits or losses of the business on a Schedule K-1.
- Some expenses of the shareholders of an S Corporation can be written off as business expenses.
- The state tax requirements for S Corporations vary from state to state.