S Corporation
A pass-through tax election under Subchapter S of the Internal Revenue Code that avoids corporate double taxation while allowing shareholder-employees to reduce self-employment tax.
Detailed Explanation
S-corp election is made on Form 2553. The S-corp files Form 1120-S annually and issues each shareholder a Schedule K-1. Active shareholder-employees must take reasonable W-2 compensation, which is subject to FICA and Medicare, before drawing distributions, which are not subject to self-employment tax. The IRS audits unreasonably low compensation aggressively. Eligibility limits include no more than 100 shareholders, all of whom must be US citizens or residents (with limited exceptions for certain trusts).
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Learn about Business Tax PreparationRelated Terms
Form 1120-S (S Corporation Income Tax Return)
The annual federal income tax return filed by S corporations, which pass income, deductions, and credits through to shareholders via Schedule K-1.
Form 2553 (S Corporation Election)
The IRS form used to elect S corporation tax status for an eligible domestic corporation or LLC, generally due within 75 days of the start of the tax year.
Pass-Through Entity
A business entity that does not pay federal income tax at the entity level; instead, profits and losses pass through to owners who report them on their individual returns.
Schedule K-1
A tax document issued by partnerships, S corporations, estates, and trusts to report each owner's share of income, deductions, credits, and other tax items.
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