File Taxes For Your
S-Corp
CPAs file taxes, AI makes it 4x faster
Business Taxes
What kind of entity do you have?
S Corp Taxes For Dummies: Everything You Need To Know
If you're running an S Corporation or thinking about starting one, understanding how S Corps are taxed can be very helpful. S Corps are unique because they combine the best of both worlds—offering the limited liability of a corporation and the tax benefits of a partnership.
However, tax laws can be confusing. That's where we come in. We'll break down how S Corps are taxed, the S Corp tax rate and S Corp tax brackets.
Table of contents
Key Takeaways:
- S Corp owners have to pay taxes on their salary and distributions.
- There is no separate S corporation tax rate; it all depends on your personal tax situation.
- S Corp tax write-offs can help lower taxable income.
How are S Corps taxed?
Unlike traditional corporations, S Corps don't pay the federal corporate income tax rate at the business level. Instead, the profits and losses pass through to the shareholders, who report them on their personal tax returns.
This means the income is taxed at the individual level, not at corporate rates. It's a big plus because it helps you avoid the dreaded double taxation that C Corporations face, where income is taxed both at the corporate level and again as shareholder dividends.
So, how does it work? Each shareholder pays taxes on their share of the corporation’s profits, whether or not the profits are actually distributed. This is called pass-through taxation. For example, if you own 50% of an S Corp, you'll report 50% of the profits or losses on your personal return.
Let's talk about the S Corp tax rate. Since the income passes through to your personal tax return, it’s subject to your individual tax rate, which varies depending on your overall income. This can range from 10% to 37% based on the current tax brackets. There’s no separate S Corp tax rate, it all hinges on your personal tax situation.
Another important facet is payroll taxes. If you’re a shareholder who works for the S Corp, you must be paid a reasonable salary, which is subject to payroll taxes like Social Security and Medicare. The remaining profits can be distributed as dividends. The S Corp distribution tax rate is simply your personal tax rate based on your income tax bracket. Shareholders may also need to make estimated tax payments based on what they expect to owe if they owe over $1,000.
How are S Corp distributions taxed?
When you own and operate as an S Corp, you need to understand how S Corp distributions are taxed. Instead of the S Corp paying taxes at the federal corporate income tax rate, the profits pass through to you and other shareholders and you report them on your personal taxes.
S Corp distributions aren’t subject to payroll taxes. If you work for your S Corp, you must pay yourself a “reasonable” salary, which does get hit with payroll taxes like Social Security and Medicare. Any additional profit can be distributed to you as dividends. This is where the S Corp distribution tax rate comes into play, and it helps you save on taxes.
However, these distributions are still taxed at your personal income tax rate, which ranges from 10% to 37%. There isn’t a separate S corporation tax rate; it all depends on your personal tax situation.
Additionally, if you receive more in distributions than your basis in the S Corp, the extra amount will be taxed as a capital gain. Your basis is your investment in the company, adjusted for contributions and earnings.
S Corp tax brackets
S Corps themselves don’t have tax brackets or an S corporation tax rate because they don’t pay taxes at the corporate level. So, when we say S Corp tax brackets, we’re really referring to the tax brackets that apply to you as an individual.
Your S Corp income is divided among the shareholders based on their ownership percentages. Each shareholder pays taxes on their share of the income according to their personal tax brackets.
For 2024, the individual tax brackets in the US range from 10% to 37%:
- 10% on income up to $11,000 for single filers, or $22,000 for married couples filing jointly.
- 12% on income over $11,000 and up to $44,725 for single filers, or over $22,000 and up to $89,450 for married couples.
- 22% on income over $44,725 and up to $95,375 for single filers, or over $89,450 and up to $190,750 for married couples.
- 24% on income over $95,375 and up to $182,100 for single filers, or over $190,750 and up to $364,200 for married couples.
- 32% on income over $182,100 and up to $231,250 for single filers, or over $364,200 and up to $462,500 for married couples.
- 35% on income over $231,250 and up to $578,125 for single filers, or over $462,500 and up to $693,750 for married couples.
- 37% on income over $578,125 for single filers, or over $693,750 for married couples.
S Corporation tax write-offs
S Corporation tax write-offs can be a great way to reduce your taxable income and save money. They have to be ordinary and necessary expenses to your business. You should report your deductions on Form 1120-S when filing your returns.
Employee salaries and benefits: Salaries and wages you pay to employees, along with benefits like health insurance are deductible. If you pay an employee $50,000 annually and contribute $5,000 towards their health insurance, both amounts are deductible.
Office supplies and equipment: Suppose you own a graphic design business and buy a new laptop for $1,500. This expense is considered a write-off, and you can deduct it from your business income. Similarly, if you spend $200 on office supplies like pens and paper, these costs are also deductible.
Business insurance: Business insurance premiums like general liability, property insurance and workers' comp are deductible. For example, if you pay $1,350 annually for business liability insurance, that amount can be deducted from your business income. This helps lower your taxable income and, consequently, the S corp tax rate applied to your personal income.
Advertising and marketing: Expenses for advertising and marketing your business are also deductible. If you spend $1,000 on a social media advertising campaign or $500 on flyers, these amounts can be written off.
Rent and utilities: Rent for office space is fully deductible. For example, if you pay $1,000 a month in rent, that's a $12,000 deduction for the year. Utilities like electricity and internet are also deductible, but you may need to calculate the business use percentage if you work from home. These write-offs help reduce your taxable income and ultimately the S corp distribution tax rate applied to your share of the income.
Travel and meals: If you travel for business, you can deduct the costs associated with that trip. Say your flight costs $300, your hotel stay is $600, your meals are $200 and you paid $110 for a conference ticket, you can deduct these expenses. Just remember that meal deductions are generally only 50% of the cost.
Vehicle expenses: When you use your vehicle for business, you can choose between the standard mileage rate or actual expenses method to lower your S Corporation tax rate. If you drive 1,000 business miles and use the standard mileage rate (67 cents per mile in 2024), you can deduct $670. If you choose the actual expenses method, you can deduct the business portion of expenses like maintenance, repairs, gas, tolls and insurance.
Professional services: Professional services payments to accountants, lawyers or consultants are deductible. If you spend $500 on hiring a CPA, you can write off this amount.
Education and training: You can deduct costs related to education and training if they directly benefit your business. This includes things like online courses, workshops, training camps and seminars. So if you spend $800 on a marketing seminar to improve your business skills, that expense is deductible.
FlyFin offers unlimited expert CPA support on the app along with AI that finds all your deductions to save you the most possible. S Corp owners can choose the Ultimate Plan subscription to manage and file accurate business taxes.
What’s FlyFin?
FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors.
But anyone can file taxes through FlyFin! FlyFin tracks all your business expenses automatically using A.I. to find every possible tax deduction.
Then, our CPA team files a guaranteed 100% accurate tax return for you – to save you a couple thousand dollars and a ton of time on your taxes.
Download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and more money on your taxes than last year, guaranteed.
Expert tax CPAs ensure 100%-accurate tax filing
A.I. finds every tax deduction, eliminating 95% of your work
On average users save $3,700
Was this tip useful?
Yes
No