Understanding the tax obligations of different business structures, particularly S corporations, can be overwhelming. Here, we dive deep into how S corporations, or "S corps," interact with the IRS and their unique tax filing requirements.
S corporations, also known as S corps, have a special designation through the IRS that affects their tax filings. Before the introduction of Subchapter S in 1958, all corporations were subject to double taxation: the corporation itself paid taxes, and shareholders paid taxes on dividends. However, with the advent of Subchapter S, S corps saw a transformation in their tax obligations.
What are S corps?
Essentially, S corps are business entities that:
- Are incorporated within the US
- Have a cap of 100 shareholders
- Possess just one class of stock
However, it's worth noting that even if businesses meet these criteria, certain types, like some financial institutions, might still be ineligible for the S corp status. As for shareholders, only individuals and trusts can hold shares, excluding partnerships or corporations. To acquire this status, corporations must fill out Form 2553, backed by signatures from every shareholder.
Tax Implications for S corps
Labeled as “pass-through entities,” S corps don’t pay federal taxes directly. Instead, individual shareholders report their shares of earnings and deductions on personal tax returns. This unique structure allows them to enjoy the benefits of both partnerships and corporations. An interesting point to note is how the IRS initiated the S corp structure to bolster the success of small businesses that were grappling with double taxation.
S corps tax filing tips
When it comes to tax filings, S corps submit personal tax returns, reporting their earnings through Form 1120-S. This form captures a comprehensive view of their financial activities, from profits and losses to shareholder distributions. An integral part of this process is the Schedule K-1, detailing each shareholder's percentage of shares. Unlike their counterparts, the C corporations that file quarterly, S corps have an annual filing obligation, typically by March 15 (for those following a calendar year).
In Need of Expertise?
Switching to an S Corp tax designation can be a significant advantage for your business. However, managing all the logistical and payroll-related processes can be challenging. That's where CAVU HCM comes in, providing the expertise, customer support, and software necessary to help your S Corp manage payroll effectively, take advantage of numerous tax benefits, and stay compliant with ever-changing regulations. If you'd like to see how CAVU HCM can revolutionize your S corp payroll operations, please feel free to request a personalized demo now.