Congratulations! You have successfully incorporated your business as an S corporation, a special type of corporation that offers you the benefits of limited liability and pass-through taxation.
But now, you face a new challenge: how to file your S corporation taxes for the first time. Filing S corporation taxes can be confusing and complicated, especially if you are not familiar with the rules and requirements of the IRS and your state tax authority. But don’t worry, you are not alone.
Peruse this guide to help you understand the basics of S corporation taxation, the steps you need to follow to file your S corporation taxes, and the resources you can use to make your tax filing easier and more accurate. Start now!
- Understand the Basics of S Corporation Taxation
- Track Your Income And Expenses And Prepare Your Financial Statements
- File Your Employer’s Quarterly Federal Tax Returns Using Form 941 or 943 (for farm employees)
- File Your Federal Unemployment Tax Return Using Form 940
- Use Form W-2 to Report Employee Wages And Salaries
- Use Schedule K-1 (Form 1120S) to Report to S Corp shareholders Their Share of the S Corporation’s Income Or Losses
- File Your Income Tax Return Using Form 1120S
- Consider Your State Tax Obligations
1. Understand the Basics of S Corporation Taxation
Imagine you are a chef who owns a restaurant. You love cooking delicious food for your customers, but you also want to save money on taxes and protect your personal assets from lawsuits. You decide to incorporate your restaurant as an S corporation, a special type of business structure that offers you some advantages over other types of corporations.
An S corporation is a corporation that elects to pass its income, losses, deductions, and credits to its shareholders, who are the owners of the business. This means that you and your fellow shareholders, if you have any, report the income or losses of the restaurant on your personal tax returns, and pay taxes at your individual tax rates. This way, you avoid paying corporate taxes on the restaurant’s income.
However, to qualify as an S corporation, your restaurant must meet certain requirements. For example, you can only have up to 100 shareholders, and they must be individuals, certain trusts, or estates. You cannot have partnerships, corporations, or non-resident aliens as shareholders.
You can only have one class of stock, meaning that all shareholders have the same rights and privileges. And you cannot be an ineligible corporation, such as a bank, an insurance company, or a foreign corporation.
To become an S corporation, file Form 2553, Election by a Small Business Corporation, with the IRS.
Get the consent of all your shareholders, and file the form by the due date of your first tax return as an S corporation. Once you file the form, the IRS can now be treating you as an S corporation for tax purposes, unless you revoke the election or lose the eligibility.
2. Track Your Income And Expenses And Prepare Your Financial Statements
To track your income and expenses, keep track of how much money your S corporation makes and how much it spends during the year. Use accounting software, spreadsheets, or paper records to do this. You also need to prepare your financial statements, which are documents that show your S corporation’s financial performance and position.
The main financial statements are the income statement, the balance sheet, and the statement of cash flows. Find templates and examples of these statements online or use accounting software to generate them.
3. File Your Employer’s Quarterly Federal Tax Returns Using Form 941 or 943 (for farm employees)
Know that this step is for your employees. File a quarterly tax return to report the wages, tips, and other compensation you pay to your employees, as well as the federal income tax, social security tax, and Medicare tax you withhold from their paychecks. Moreover, report the employer’s share of social security and Medicare taxes.
You can use Form 941 or Form 943 (if you have farm employees) to do this. File these forms by the last day of the month following the end of each quarter. For example, for the first quarter (January to March), you need to file by April 30. You can file these forms online or by mail.
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4. File Your Federal Unemployment Tax Return Using Form 940
Just like the previous step, note that this step is also for S corporations that have employees. File an annual tax return to report the federal unemployment tax (FUTA) you owe to your employees. FUTA is a tax that provides funds for state unemployment programs.
You only need to pay FUTA if you pay at least $1,500 in wages to your employees in any calendar quarter, or if you have at least one employee for at least some part of a day in any 20 or more different weeks in the year.
The FUTA tax rate is 6% of the first $7,000 of each employee’s annual wages, but you can get a credit of up to 5.4% if you paid state unemployment taxes. Use Form 940 to calculate and report your FUTA tax. You need to file this form by January 31 of the following year. You can file this form online or by mail.
5. Use Form W-2 to Report Employee Wages And Salaries
Report the wages, tips, and other compensation you pay to your employees, as well as the federal income tax, social security tax, and Medicare tax you withhold from your employee’s paychecks, on Form W-2.
You also need to report the employer’s share of your Social Security and Medicare taxes, as well as any other benefits or deductions you provided to your employees, such as health insurance, retirement plans, or education assistance.
Give each employee a copy of his or her Form W-2 by January 31 of the following year. Also, send copies of all the Forms W-2 to the Social Security Administration by January 31 of the following year. You can file these forms online or by mail.
6. Use Schedule K-1 (Form 1120S) to Report to S Corp shareholders Their Share of the S Corporation’s Income Or Losses
Do you run an S corporation that has shareholders? If yes, report to each shareholder his/her share of the S corporation’s income, losses, deductions, credits, and other items that affect his/her tax liability. Use Schedule K-1 (Form 1120S) to do this.
Give each shareholder a copy of Schedule K-1 by March 15 of the following year. You also need to attach copies of all the Schedules K-1 to your S corporation’s income tax return, Form 1120S.
7. File Your Income Tax Return Using Form 1120S
Are you wondering how you can file the income return of your S corporations? This step is for you. Use Form 1120S to report your S corporation’s income, losses, deductions, credits, and other items that affect your shareholders’ tax liability. Attach copies of all the Schedules K-1 that you give to your shareholders. You need to file Form 1120S by March 15 of the following year. You can file this form online or by mail.
8. Consider Your State Tax Obligations
Be aware that some states may require additional forms or fees for S corporations.
Note that this step is for you to check your state tax obligations, as some states may have different rules or requirements for S corporations than the federal government. For example, some states may not recognize the S corporation status and may tax the S corporation as a regular corporation.
Some states may require S corporations to file additional forms or pay additional fees. Some states may have different deadlines or tax rates for S corporations. Check with your state tax authority or a tax professional to find out what your state tax obligations are as an S corporation and how to fulfill them.
Here is a list to help you remember this step:
- Check your state tax obligations
- File additional forms or pay additional fees if required
- Meet the deadlines and tax rates for your state
- Consult a tax professional if needed
Recap
To file S corp taxes successfully, elect S corporation status by filing Form 2553 with the IRS. Then, track your income and expenses and prepare your financial statements. File your employer’s quarterly federal tax returns using Form 941 or 943.
Moreover, file your federal unemployment tax return using Form 9401 and report employee wages and salaries using Form W-2. In addition, Report shareholder income and losses using Schedule K-1 (Form 1120S).
By following these steps, you can ensure that you comply with the tax laws and regulations that apply to your S corporation
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. . For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein.
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