How Are S Corps Taxed?
- S-Corp Guide
- Oct 31, 2025
- 12 min read
A Complete Guide to S Corporation Taxation
If you're considering S Corporation status for your business, understanding how S Corps are taxed is essential. The taxation structure is fundamentally different from regular corporations, and there's a lot of confusion about who actually pays the taxes and when.
Let's walk through exactly how S Corporation taxation works, what tax forms you need to file, and what your personal tax obligations look like as an S Corp owner.
Understanding Pass-Through Taxation: Who Really Pays the Tax?
The critical point to understand with S-Corp taxation is this: The IRS does not tax the S Corporation entity itself. Instead, the IRS taxes you—the owner—on your personal tax return.
This is called "pass-through" taxation, and it's fundamentally different from how regular C Corporations work.
How C Corporations Are Taxed (For Comparison)
To help illustrate the concept of pass-through taxation, lets start by illustrating how taxes work for a C Corp:
The C corporation earns $100,000 in profit
The C corporation pays corporate income tax on that $100,000 (21% federal rate = $21,000)
The C corporation has $79,000 left after taxes
If the C corporation distributes that $79,000 to you as dividends, you pay personal income tax on those dividends
This creates "double taxation"—the same money is taxed twice (which is often why S Corps are more advantageous)
How S Corporations Are Taxed (Pass-Through)
Ok, now that we understand how C Corps are taxed, lets contrast that to how S Corps are taxed with the example below:
The S corporation earns $100,000 in profit
The S corporation pays $0 in federal income tax
The $100,000 "passes through" to your personal tax return - meaning your personal tax return reports this $100,000 -- your taxable income is increased by this amount.
You pay personal income tax on the $100,000 once
The S Corporation itself is essentially invisible to the IRS for income tax purposes (you still need to file the S Corp return though!). All profit and loss flows directly to you as the owner and is reported on your Form 1040.
The Keys To Pass-Through Entity Taxation
The S Corp's profit is reported on its 1120-S tax return, but no tax is paid directly by the S Corp with this tax return
Instead, your S Corp's profit becomes part of your taxable income.
You pay tax on S Corp income whether you actually take the money out of the business or not
If your S Corp makes $150,000 but you only took $80,000 as salary and distributions, you still pay tax on the full $150,000
Your personal tax rate determines how much tax you pay on S Corp income
Think of it this way: The S Corporation is like a transparent box. The IRS looks right through the corporation and taxes the owners as if they earned the money directly.
Form 1120-S: The S Corporation's Tax Return
Even though the S Corp doesn't pay federal income tax, it still must file an annual tax return with the IRS.
What Is Form 1120-S?
Form 1120-S (U.S. Income Tax Return for an S Corporation) is an informational return and it reports to the IRS the following:
Total business income and expenses
Net profit or loss
How that profit/loss is allocated among shareholders
Deductions and credits the business qualifies for
The 1120-S doesn't calculate tax owed by the corporation—instead, it calculates each owner's share of income that will be reported on their personal returns. This information is reported by Schedule K-1.
Key Filing Requirements
Tax Return Due Date: March 15th (for calendar-year S Corps)
If your tax year ends December 31, you must file by March 15 of the following year
This is one month earlier than individual tax returns (April 15)
Extensions Available: You can file Form 7004 for an automatic 6-month extension
This extends your filing deadline to September 15
Important: An extension to file is NOT an extension to pay taxes (though remember, the S Corp entity doesn't owe federal income tax anyway, so this is only applicable to you as an individual on your Form 1040)
Who Must File:
Every S Corporation must file Form 1120-S, even if it had no income or deductions
Even single-owner S Corps must file
Schedule K-1: The Keystone To S Corp Taxes
Along with Form 1120-S, the S Corporation must prepare a Schedule K-1 for each shareholder. The K-1 is so important is because it shows each shareholder all of their vital tax information, which is what links the S Corp to their personal return. The K-1 tells each shareholder what to put on their personal return. So, on Schedule K-1 is the following information:
Your share of the S Corp's profit or loss
Your share of deductions and credits
Any distributions you received during the year
You need your K-1 to file your personal tax return. This is why S Corps must file by March 15—so owners have their K-1s in time to file personal returns by April 15.
Understanding Form 1120-S
Form 1120-S is more complex than the Schedule C that sole proprietors use. Understanding what's included can help you decide whether to tackle it yourself or hire a professional, or at least be able to confidently read and analyze your tax return.
Income section: Your business revenue and gains from asset sales. This information comes directly from your Profit and Loss Statement.
Deductions Section: All your business expenses including officer compensation (your W-2 salary), employee wages, payroll taxes, rent, depreciation, and other ordinary business costs. Again, pulled from your P&L.
Schedule K: Schedule K breaks down everything that passes through to shareholders. This includes your ordinary business income, but also rental income, interest, dividends, capital gains, charitable contributions, and Section 199A (QBI) information. Each item flows to shareholders' individual Schedule K-1s in proportion to their ownership percentage. This matters because different types of income may be taxed differently on personal returns.
Schedule L: S Corps must include a balance sheet showing the company's financial position at year-end. This includes all assets (cash, equipment, accounts receivable), all liabilities (loans, accounts payable), and equity (capital stock and retained earnings). The balance sheet must actually balance—assets must equal liabilities plus equity. This requires proper bookkeeping throughout the year, not reconstruction in March.
Schedule M-1: This reconciles your book income (what your accounting software shows) with your taxable income (what appears on the tax return). Common adjustments include tax-exempt income, non-deductible expenses like meals limitations, and depreciation differences between book and tax methods. If your books show $100,000 profit but your return shows $60,000, Schedule M-1 explains the $40,000 difference.
Schedule M-2: This tracks the S Corp's accumulated earnings that haven't been distributed. It increases with income and decreases with losses and distributions. This matters for determining whether distributions are tax-free or taxable to shareholders.
1120-S Preparation: DIY vs Paid Professional
After digest what's actually on the 1120-S you might be wondering - can I prepare Form 1120-S myself? Technically, yes, you can. Tax software like TurboTax Business exists for this specific purpose. The better question here might be: Should you prepare it yourself? That's harder to answer, and depends on a lot of considerations, let's dive into that below:
DIY Might Work If:
You have a simple S Corp (single owner, no employees except yourself)
You're comfortable with accounting and tax forms
Your books are clean and properly categorized
You don't have complex transactions (asset sales, shareholder loans, multiple states)
You're willing to invest significant time learning the requirements
A Paid Professional Might Work Better If:
This is your first year as an S Corp
You have multiple shareholders or employees
You have complex transactions or operate in multiple states
Your books need cleanup
You want strategic tax planning, not just form completion
Your time is worth more than the $1,500-$3,000 Tax Pro fee
Why Most S Corp Owners Hire Tax Pros:
It's not just about form complexity—it's about value. A good tax pro will become a trusted advisor for your business. Someone who can help you in an area where they are highly specialized, allowing you to focus on your core purpose: growing your business. A good tax pro will:
Identifies deductions you're missing
Optimizes your salary/distribution split for maximum tax savings
Plans for estimated payments to avoid penalties
Defends your return if audited (and carries malpractice insurance)
Provides strategic tax advice throughout the year
Costs of Hiring a Tax Pro:
Typical CPA Costs:
Simple S Corp: $1,500-$2,500
Moderate complexity: $2,500-$4,000
Complex situations: $4,000+
In addition to thinking about the cost you have to pay, think about the hidden costs of an incorrect return. An incorrect return can trigger audits, penalties, and interest. A $2,000 CPA fee is cheap insurance compared to a $10,000 tax problem.
Our Recommendation: Hire a Tax Pro for at least your first 2-3 years as an S Corp. Learn the requirements, establish good systems, and understand your specific tax situation. After that foundation, you can reassess whether DIY makes sense. Most S Corp owners stick with Tax Pros not because they can't do it themselves, but because professional preparation and strategic advice deliver more value than they cost.
Your Personal Tax Obligations as an S Corp Owner
Now that we've gone through the specific requirements for your S Corp and the tax return it must file, lets shift our attention to the impact that being an S Corp owner has on your personal tax return, Form 1040.
Reporting S Corp Income (Schedule E)
The profit from your Schedule K-1 from the S Corp is reported on Schedule E (Supplemental Income and Loss) of your Form 1040. This income is subject to federal income tax and state income tax (in most states).
It's important to note that this income is not subject to self-employment tax (this is where the savings come from of being an S Corp!)
If your S Corp had a loss, that loss may be deductible on your personal return (subject to basis limitations and passive activity rules).
W-2 Wages from Your S Corp
As an owner of the S Corp, you must pay yourself a reasonable salary. Its a requirement from the IRS, and this salary appears on a W-2 (just like any other employee). This salary is then reported on Line 1 of your Form 1040 (wages). Like any other salary, you will have payroll taxes withheld (Social Security and Medicare) as well as federal and state income tax withheld. Your W-2 wages are subject to payroll taxes (15.3% total—half paid by you, half by the company) but reduce the S Corp's taxable profit.
Estimated Quarterly Tax Payments
Since S Corp profit passes through to you but isn't subject to withholding (like W-2 Wages are), you typically need to make estimated quarterly tax payments to cover your Federal and State income tax, as sourced from your S Corp profits. These payments are due quarterly, and carry the following deadlines:
Q1: April 15
Q2: June 15
Q3: September 15
Q4: January 15 (of the following year)
The amount you should pay with each quarterly estimated tax payment is a complex topic that we'll cover in another post, but generally, you need to pay the lesser of:
90% of current year's tax liability, or
100% of prior year's tax liability (110% if AGI > $150,000)
Many S Corp owners underpay estimated taxes their first year because they don't realize how much income is passing through to their personal return beyond their salary. This is another reason we always mention working with a Tax Pro the first few years, so that you don't underpay and get hit with interest and penalties.
Qualified Business Income (QBI) Deduction
As an S Corp owner, you may qualify for the Section 199A deduction, which is more commonly referred to as the QBI Deduction, which allows you to deduct up to 20% of qualified business income. Said another way - this deduction may decrease your taxable income, by up to 20% of your S Corp Profits.
This deduction is nuanced, has limitations for high earners and certain service businesses, but can result in significant tax savings if included on your personal tax return correctly.
Want to See Your Tax Liability In Numbers?
Calculating your exact tax situation as an S Corp can be complex. Our S Corp Tax Savings Calculator shows you:
How much you'd pay as an LLC vs. S Corp
Your estimated quarterly tax payments
The impact of the QBI deduction on your specific situation
A complete breakdown you can download as a PDF
For a deeper dive into the mechanics of S Corp tax savings, check out our guide: How Does S Corp Save Taxes?
State-Level Tax Considerations
While it may be a universal rule that S Corps don't pay federal income tax, state taxation varies significantly from state-to-state. Ensure your state requirements a understood, in addition to your federal requirements for a complete tax picture.
States That Follow Federal Treatment
Most states recognize S Corporation status and follow the federal pass-through model:
The S Corp files an informational state return
Profit passes through to owners' state tax returns
Owners pay state income tax on their share
You will need to research directly on your state's Department of Revenue/Tax website, to determine their specific S Corp requirements. While most states fall into this category, there are a few well-known outliers that we'll illustrate next.
States with Entity-Level S Corp Taxes
The following is a list of well-known states that don't follow the federal pass-through model, and if you incorporate in these states, you will have additional filing and tax liability requirements.
California:
1.5% franchise tax on S Corp income
Minimum $800 annual franchise tax (even with $0 income)
Additional fees based on gross receipts
New York City:
8.85% unincorporated business tax on S Corp income
Only applies to S Corps operating in NYC
Texas:
Franchise tax (margin tax) applies to S Corps
Based on revenue, not income
Many small businesses fall below the threshold
Tennessee:
Excise tax of 6.5% on S Corp income
One of the few states that actually taxes S Corp profits at the entity level
New Hampshire:
Business Profits Tax (7.5%) and Business Enterprise Tax (0.5%)
Apply to S Corp income above certain thresholds
Advanced Topic: Pass-Through Entity (PTE) Tax Elections
The Tax Cuts and Jobs Act of 2017 capped the State and Local Tax (SALT) deduction at $10,000 on personal tax returns. Before 2018, you could deduct unlimited state income taxes. If you paid $50,000 in state taxes, you deducted $50,000 on your federal return. After the cap, you can only deduct $10,000 maximum—the rest provides zero federal tax benefit.
This especially hurts S Corp owners in high-tax states. S Corp income passes through to your personal return where it's subject to both federal and state tax. In states like California (13.3% top rate), New York (10.9%), or New Jersey (10.75%), you might pay $35,000 in state tax but only deduct $10,000 federally. The other $25,000 effectively increases your federal tax bill by about $9,000.
Seeing the negative tax impact this imposed on small business owners, many states created a workaround: allow S Corps to elect to pay state income tax at the entity level instead of the owner level. This is called a PTE Tax Election.
Let's evaluate how a PTE Tax Election works, by comparing the 2 available options:
Traditional approach: Your S Corp passes through $300,000 profit to you. You pay $35,000 California tax personally but can only deduct $10,000 on your federal return due to the SALT cap. This results in an effective increase of $25,000 taxable on your federal tax return.
PTE election approach: Your S Corp elects to pay the $35,000 California tax at the entity level, meaning you pay this tax directly from your S Corp to California. This becomes a business deduction, reducing S Corp profit to $265,000 before it passes through. You receive a California tax credit on your personal return for the entity-level tax already paid.
The result: You get a full federal deduction for state taxes, bypassing the $10,000 cap. In this example, that's $25,000 of additional deductions × 37% federal bracket = approximately $9,000 in federal tax savings.
Over 30 states now offer PTE elections, including California, New York, New Jersey, Connecticut, Illinois, Georgia, North Carolina, Virginia, Colorado, Wisconsin, Minnesota, and Oregon. Each state has different rules and deadlines.
The PTE election saves money when you're itemizing deductions, your state income tax exceeds $10,000, and you have positive S Corp income. It doesn't help if you take the standard deduction, your state taxes are under $10,000, or your S Corp has losses.
Election timing varies by state—some require annual election by March 15, others allow election until tax return deadline. The S Corp must make estimated PTE tax payments during the year, and you must track the credit on your state return.
If you're in a high-tax state paying more than $10,000 in state income tax, ask your CPA if your state offers PTE election and calculate potential savings. For high-income S Corp owners in states like California, New York, or New Jersey, this can save $10,000-$20,000+ annually in federal taxes.
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Wrapping Up: Understanding Your S Corp Tax Obligations
S Corporation taxation is fundamentally different from other business structures because the IRS taxes you—the owner—rather than the business entity itself. This pass-through structure creates significant tax savings opportunities but comes with specific obligations:
The S Corp files Form 1120-S by March 15 (informational only, no tax owed)
You receive a Schedule K-1 showing your share of profit/loss
You report S Corp income on Schedule E of your personal return
You pay income tax on pass-through profit (but not self-employment tax—this is the savings)
You must pay yourself a reasonable W-2 salary subject to payroll taxes
You typically make quarterly estimated tax payments to cover income tax on pass-through profit
State requirements vary significantly—some states impose entity-level taxes despite federal pass-through treatment
The complexity of S Corp taxation is why most owners work with CPAs or tax professionals. The tax savings often far exceed the professional fees, and proper compliance protects you from IRS penalties and audits. Understanding how S Corps are taxed isn't just about compliance—it's about maximizing your tax efficiency and keeping more of what you earn.
Legal Disclaimer: The information provided in this article is for educational purposes only and should not be construed as tax, legal, or financial advice. Tax situations are highly individual and complex. Always consult with a qualified tax professional, CPA, or attorney before making any decisions regarding S-Corporation elections, entity structure changes, or tax planning strategies. Calculator results are estimates only and may not account for all relevant tax provisions or your specific circumstances. SCorpGuide.com and Forever Exploring LLC are not liable for any decisions made based on information provided on this site. For complete terms, see our Terms and Disclaimers.
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