S Corp Taxes For Dummies: How To Maximize Savings

An S Corporation or S Corp is a special type of business structure that allows profits, losses, deductions and credits to be passed through to its owners for tax purposes. This is one of the main benefits of an S Corp. Here’s a simple S Corp definition: It is a business that has made a choice with the IRS to be taxed differently than a regular corporation. To qualify, the business must be based in the U.S., have no more than 100 shareholders and offer only one type of stock. To become an S Corp, a business needs to file Form 2553 with the IRS. This is called making an S Corp election. All the shareholders have to agree for this change to happen. The form must be filed within two months and 15 days after the start of the tax year when the S Corp status should begin. Each year, an S Corp files an 1120-S form with the IRS. This form reports the financial information and shows each shareholder’s share of these items. The IRS pays close attention to S Corporation returns because there's a risk of tax avoidance. For instance, if you earn $150,000 but only report $40,000 as a salary, the IRS might investigate. It's important to designate a "reasonable" amount of income as wages, not distributions. What's considered "reasonable" can be vague, but if you push it too far, you could face an IRS audit and penalties for unpaid taxes.

The S Corp tax return due date is March 15th. This means that all S Corporations must file their tax returns by this date. If the deadline falls on a weekend or holiday, the due date is the next business day. S Corporations use the 1120-S form to file their tax returns. If you need more time to file, you can request a six-month extension by filing Form 7004. This extension will move the deadline to September 15th. However, it’s important to remember that any taxes owed are still due by March 15th. The extension only gives more time to complete the paperwork, not to pay the taxes. As S Corp shareholders pay taxes on their personal returns, their tax liability depends on their tax bracket. As S Corps are pass-through entities, there are no separate S Corp tax brackets. A tax bracket calculator can help find what you owe so you can file by the S Corp tax return due date.

The biggest benefit of an S Corp is avoiding double taxation. In a regular corporation, the profits are taxed twice: once at the corporate level and again at the individual level when dividends are paid out. In a pass-through entity like an S Corp, profits are only taxed at the individual level. Say you own a small business and decide to make the S Corp election. By doing so, you avoid the corporate tax rate of 21%. Instead, your business income is reported on the 1120-S form by the S Corp tax return due date. Imagine your S Corp earns $100,000 in profit. If your business were a regular corporation, it would pay $21,000 in taxes at the corporate tax rate. As an S Corp, this $100,000 passes through to your personal tax return and is dependent on your personal federal S Corp tax rate. Additionally, shareholders can use business losses to reduce their personal income tax. S Corps can also save money on self-employment taxes because shareholders only pay these taxes on their salary, not on their share of the company’s income. Another great benefit of an S Corp is that it provides asset protection for its shareholders. Shareholders are not personally responsible for the S Corp's debts and liabilities unless they have given a personal guarantee. This means creditors cannot go after shareholders' personal assets to pay off business debts.

When you’re filling out your S Corp tax return, you may be wondering how exactly S Corp taxes work. S Corp owners don’t pay corporate taxes, but they are on the hook to pay federal income taxes and state taxes. There is no set S Corp tax rate, so your owed tax amount depends on your taxable income and S Corp tax brackets. An S Corp tax calculator can help you find what you owe.

An LLC taxed as an S Corporation blends the benefits of an LLC with the tax advantages of an S Corporation. This setup provides owners with liability protection and potential tax savings. To start, the LLC must file for an S Corp election by submitting Form 2553 to the IRS. This election allows the LLC's income to pass through to owners' personal tax returns, avoiding corporate taxes at the corporate tax rate. When it comes to tax day, the LLC has to use the 1120-S form. This form is due by March 15th, with an option to request an extension using Form 7004. Income distributed to owners is taxed at the S Corp tax rate, subject to individual income tax brackets. This often results in lower overall taxes compared to paying self-employment taxes on all earnings. For instance, if an LLC's owners receive $210,000 each in profits, electing S Corp status allows them to pay themselves salaries and take the rest as distributions, potentially reducing self-employment tax liability.

Every dollar your S Corp spends on valid business expenses can lower your taxable income. You can use a 1099 S Corp tax calculator to find all your tax write-offs. One major deduction is for salaries and benefits paid to employees, including shareholder-employees. The IRS lets S Corps deduct health insurance premiums for employees and shareholders who own 2% or more of the company. These premiums count as fringe benefits and are deductible like wages on your S Corp tax return. Business insurance premiums are deductible too, whether it's liability or property insurance. These expenses protect your business assets and reduce taxable income. You can also deduct a portion of rent and utilities if your S Corporation leases office space or uses a home office exclusively for business. This includes expenses like electricity and internet used for business purposes. Office expenses like stationery, printer ink, and office cleaning are also deductible, along with repairs for office equipment. These expenses are essential to keep your workspace running smoothly. S Corporations can deduct startup costs over time, but up to $5,000 of these expenses can be deducted in the first year when the business starts. Startup costs eligible for deduction include things like business travel, legal fees, market research, advertising and CPA fees. When your S Corporation makes donations to qualified charities, whether money or goods, those contributions are deductible. This allows you to support causes you care about while lowering your taxes. If your business is involved in research and development, exploring R&D tax credits can significantly reduce taxable income by offsetting innovation-related costs. Additionally, the Electric Vehicle (EV) Credit lets you deduct up to $7,500 when you buy a hybrid or electric vehicle. Pass-through entities can also take advantage of the QBID. The Qualified Business Income Deduction allows S Corps to deduct up to 20% of their business income from their taxable income. This deduction applies to the income that passes through to shareholders. For 2024, the income limit is $191,950 for single filers and $383,900 for joint filers. As an S Corp, you can also deduct state and local taxes, known as the SALT deduction. However, there’s a catch: the 2017 Tax Cuts & Jobs Act set a limit called the SALT cap at $10,000. This cap applies to how much you can deduct for state and local taxes when you file an S Corp tax return. To get around this limit, many states (about 33 of them) have introduced something called a Pass-Through Entity Tax (PTET). This lets S Corps and other pass-through entities treat state and local taxes as a business expense rather than a personal one passed on to shareholders.