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S Corporation Taxes

Corporate Forms

While C corps file Form 1120, S corps file Form 1120-S (the "S" is for S corp). Form 1120-S is usually only informational in nature, and no tax is usually due with the filing. To record the flow of income to the shareholders, two other forms are filed. Schedule K, Shareholder's Share of Income, Credits, Deductions, and Schedule K-1, Shareholder's Share of Income, Credits, Deductions. (Yes, I know they have the same name, but the K-1 is shareholder specific taking into consideration the shareholder's percentage ownership of the S corporation. Also be sure to get the Schedule K-1 for Form 1120-S and not the K-1 for partnerships, which is a different form entirely.)

Schedule K-1 is given to each shareholder and helps you prepare your individual income tax return. Ultimately, when doing personal taxes, using the information on the K-1, you'll fill out Schedule E of your personal 1040 income tax return, and report the net income or loss from your S corporation on line 17 of your personal 1040. The 1120-S, K, and K-1 are the foundation forms of an S corporation, and they'll become your close friends.

Because S corp dividends flow to you, you'll want to be sure to become familiar with Form 1040-ES, the individual, estimated tax payments form. (Don't confuse this form with Schedule SE to the 1040. They're totally unrelated.) The U.S. Income Tax System is a pay-as-you-earn system. So in general, you can't have a huge tax bill payable at the end of the year, if you earned a big part of that money earlier in the year.

Whenever you're introduced to a new federal tax form, ask yourself if there's a corresponding state tax form. For example, your state probably requires an annual reporting on a state version of Form 1120-S. Your state government is your best source of information here.

Incidentally, if you look under "Deductions" on Form 1120-S, you'll see line 8 is for "salary and wages." This prevents wages paid to yourself and others from flowing through as "ordinary income." In other words, wages paid to yourself reduce corporate profits. This is true for a C corporation also. So, if your company "earns" $50,000 before paying any salary to you, you can effectively decide how much of the $50,000 to allocate to corporate profits and how much to allocate to your own wages. This allocation has significant tax consequences for both C and S corporations. Occasionally, you'll hear the phrase, "income splitting," when discussing this allocation. continued

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