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Everything You Need To Know About S Corp Shareholders

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Everything You Need To Know About S Corp Shareholders

Who can be an S Corp shareholder? If you have this question, you’re in the right place. S Corp shareholders are responsible for paying taxes on their portion of the corporation’s income and profits. The IRS has a set of rules that can determine who can be a qualified S Corp shareholder and outlines their rights and responsibilities.

Table of contents

Key Takeaways:...Read more

Who are the shareholders of an S Corp?...Read more

Who can be an S Corp shareholder?...Read more

What is the ownership structure of an S Corp?...Read more

Do S Corp shareholders have to be employees?...Read more

What are the rights of a shareholder in an S Corp?...Read more

Are S Corp shareholders personally liable for their business?...Read more

What are the responsibilities of S Corp shareholders?...Read more

How do shareholders get paid in an S Corp?...Read more

Do all S Corp shareholders have to take a salary?...Read more

What is the best way to pay yourself as an S Corp owner?...Read more

What is the 60/40 rule for S Corp salary?...Read more

Do shareholders in an S Corp need to pay self-employment taxes?...Read more

Is it mandatory that 1099s issued to shareholders be in the S Corp’s name?...Read more

Can you add a shareholder to an S Corp?...Read more

How often does an S Corp get audited?...Read more

Key Takeaways:

  • There can only be a maximum of 100 S Corp shareholders in a corporation.
  • Shareholders don’t pay SE tax, but have to pay income taxes.
  • S Corp shareholders have to pay themselves a “reasonable salary” if they’re actively involved in the business.

Who are the shareholders of an S Corp?

An S Corp gets its name from the tax code’s subchapter “S.” The key feature of an S Corp is its “pass-through” tax structure. This means the corporation itself doesn’t pay income tax. Instead, the financial responsibility passes through to the S Corp shareholders, who report them on their personal tax returns. The shareholders of an S Corp can be individuals, estates or even specific trusts.

Who can be an S Corp shareholder?

Eligible shareholders of an S Corp have to be US citizens or residents. Most importantly, other corporations and partnerships cannot be shareholders in an S Corp. The total number of shareholders can’t go over 100. However, family members can be treated as a single shareholder, which provides some flexibility for family-owned businesses. The idea is to keep the shareholder base relatively small and manageable, so that the company maintains its pass-through tax status, follows IRS rules and keeps its tax reporting simple.

What is the ownership structure of an S Corp?

An S Corp’s ownership structure is similar to a C Corp. It's divided into shares of stock owned by shareholders. In an S Corp, the number of shares a shareholder holds determines their ownership percentage. Unlike C Corps, S Corps can only have one type of stock. This means all shares have equal rights when it comes to distributions and liquidation proceeds. This is an important S Corp shareholder distribution rule to help ensure that the profits and losses are distributed proportionately.
Infographic entitled S Corp Ownership Structure answering the question what is the ownership structure of an S Corp.

Do S Corp shareholders have to be employees?

Shareholders who perform significant services for S Corps typically take on employee roles and receive a reasonable salary for their work. This arrangement helps the S Corp comply with IRS regulations and ensures payroll taxes are properly paid. Passive investors who do not work in the business don't need to be employees and are only entitled to receive distributions of the S Corp’s profits. This flexibility lets businesses organize their operations effectively while still following the rules.

What are the rights of a shareholder in an S Corp?

S Corp shareholders have many important rights. Shareholders have a say in important business decisions such as choosing board members, deciding on mergers and changing company rules. Shareholders also have the right to share in the corporation’s profits and losses, receive distributions and access corporate records. These rules are there to ensure shareholders can speak up about where the company's heading and to protect their investments. Regular shareholder meetings and transparent communication from the board of directors help maintain these rights and keep shareholders informed and engaged.
Infographic entitled What Are The Rights Of A Shareholder In An S Corp showing three rights that shareholders have in an S Corp.

Are S Corp shareholders personally liable for their business?

Generally, S Corp shareholders aren't personally responsible for the company's debts and liabilities. Their financial risk is usually limited to what they've invested in the business. So, if the company faces financial trouble or legal issues, shareholders' personal assets are typically safe. However, there are a few exceptions. If a shareholder guarantees a loan or gets involved in fraud, they might end up being personally liable. Additionally, if they fail to meet corporate formalities or mix their personal and business finances, this can potentially pierce the corporate veil and lead to some personal liability.

What are the responsibilities of S Corp shareholders?

S Corp shareholders have some key responsibilities including following the corporation’s bylaws and any shareholder agreements. They need to report their portion of the company's finances on their personal tax returns. Shareholders also need to ensure the corporation maintains its S Corp status by following IRS requirements, like the number and type of shareholders and the single class of stock rule. Active shareholders who work in the business are typically required to take a reasonable salary and perform their roles responsibly to support the corporation's success.
Infographic entitled What Are The Responsibilities Of S Corp Shareholders showing what shareholders have to do in a business.

How do shareholders get paid in an S Corp?

The S Corp shareholder distribution rules make it so that those who also work for the business get paid through a combination of salary and distributions. The salary is for the work they perform and is subject to payroll taxes like Social Security and Medicare. Distributions are portions of the company’s profits paid out to shareholders and are not subject to self-employment taxes. This dual payment structure allows shareholders to receive fair compensation for their services while benefiting from the tax advantages of being taxed as an S Corp. S Corp owners also have to make quarterly estimated tax payments to the IRS.

Do all S Corp shareholders have to take a salary?

Not all S Corp shareholders have to take a salary. Only those who actively work in the business and provide significant services are required to receive a reasonable salary. This salary is subject to payroll taxes. Passive shareholders don't get a salary and just receive their income through distributions. This distinction helps maintain the integrity of the S Corp’s tax structure where active income is taxed differently from passive income.

What is the best way to pay yourself as an S Corp owner?

The best way to pay yourself as an S Corp owner is to take a reasonable salary for the work you perform and, if there are additional profits, to take them as distributions. According to the IRS, the salary should reflect what would be paid for similar work in the market. In an S Corp, the profits (which are also called distributions) aren't hit with self-employment taxes, which is a huge benefit. This combination of salary and distributions for shareholders in an S Corp allows you to meet IRS requirements, adequately compensate yourself and potentially save on taxes.

What is the 60/40 rule for S Corp salary?

The 60/40 rule for S Corp salary is an informal guideline suggesting that S Corp owners take 60% of their income as salary and 40% as distributions. This approach helps make sure that the salary is reasonable, while still allowing owners to benefit from the tax advantages of distributions. Although it's not an official IRS rule, this ratio can serve as a practical benchmark to balance compliance with IRS regulations and optimize tax benefits. It’s important to periodically review and adjust this ratio if your business goes through any changes.

Do shareholders in an S Corp need to pay self-employment taxes?

Shareholders in an S Corp do not pay self-employment taxes on distributions from the corporation. However, they do pay payroll taxes (includes Social Security and Medicare) on their salary if they actively work for the business. This is one of the key tax advantages of an S Corp structure, as it allows shareholders to receive part of their income as distributions and escape the SE tax. If you’re wondering about S Corp shareholder health insurance, the owners have to pay for their own health insurance but can deduct health insurance premiums as a tax write-off.

Is it mandatory that 1099s issued to shareholders be in the S Corp’s name?

If a shareholder provides services to the S Corp as an independent contractor, the 1099 should be issued in their name. However, if the payment is for something unrelated to their role as a shareholder, it may be issued in the S Corp’s name. For example, if a shareholder is also a vendor providing separate services to the S Corp, the 1099 should reflect their independent contractor status. Issuing 1099s correctly keeps your financial records clear and helps you stay on the IRS's good side. It also makes it easy to tell apart the different roles and transactions in your business.

Can you add a shareholder to an S Corp?

You can add a shareholder to an S Corp as long as the total number of shareholders does not exceed 100 and the new shareholder meets all the eligibility requirements. Adding a shareholder typically involves issuing additional shares of stock, amending the corporation’s bylaws and updating any shareholder agreements. This could also mean changes to the S Corp shareholder distribution rules.

How often does an S Corp get audited?

The audit rate for S Corps is relatively low compared to other business entities.However, the IRS may audit an S Corp if there are any red flags like reporting discrepancies, unusual deductions or high distributions compared to salary. There's no set schedule for audits, but keeping accurate records and following IRS rules can lower your chances of being audited. Audits are rare, but it's important for any S Corp to be prepared. FlyFin offers complimentary audit support with its Ultimate Plan, which is perfect for S Corps looking for help managing their taxes. Expert CPAs offer unlimited tax support on the app along with preparing and filing returns, while AI scans your expenses to find every deduction you can use to save on your taxes.

What tax return form does an S corp file?

Filing S Corp tax return forms on time is essential for S Corps to avoid penalties. Form 1120-S and Schedule K-1 are the main S Corps tax forms.

How to file an extension for S Corp taxes?

Knowing how to file an extension for S Corp taxes is important. The deadline is March 15th every year. You need Form 7004 to do this.

How to file S Corp taxes?

S Corps have to file taxes by March 15th. You can file S Corp taxes online for free or use tax software. FlyFin has a business tax filing service that can help.

What are S Corp tax deadlines?

The deadline to file S Corp taxes for 2024 is March 15th. The same deadline also applies to filing an extension. The S Corps also have to pay taxes by this date.

How To maximize S Corp tax savings?

S Corporations are taxed as pass-through entities and have to pay self-employment taxes and federal taxes. FlyFin’s AI and expert CPAs can help save on taxes.

What tax return form does an S corp file?

Filing S Corp tax return forms on time is essential for S Corps to avoid penalties. Form 1120-S and Schedule K-1 are the main S Corps tax forms.

How to file an extension for S Corp taxes?

Knowing how to file an extension for S Corp taxes is important. The deadline is March 15th every year. You need Form 7004 to do this.

How to file S Corp taxes?

S Corps have to file taxes by March 15th. You can file S Corp taxes online for free or use tax software. FlyFin has a business tax filing service that can help.

What are S Corp tax deadlines?

The deadline to file S Corp taxes for 2024 is March 15th. The same deadline also applies to filing an extension. The S Corps also have to pay taxes by this date.

What’s FlyFin?

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