What is it?
S Corp tax status is a tax status election with the IRS. Both an LLC and a C Corp can make the S Corp tax status election. A business entity that has elected S Corp tax status with the IRS is not taxed on its net income at the corporate level, but instead passes its net income or loss through to its owners or shareholders, who report their shares of the S Corp’s pass-through net income or loss on their respective federal and state income tax returns. In comparison, owners or shareholders of a C Corp are taxed on their net income at both the corporate level and their respective federal and state income tax returns, which is known as double taxation.
Should I file for an S Corp?
Whether S Corp tax status provides an overall tax savings when compared to a sole proprietorship, partnership, or regular C Corp tax status depends on a number of factors, including: the business’s profitability, the business’s marginal tax rate, the owner’s W-2 salary, after-tax profit distributions from the business, and the owner’s personal income tax situation. The only way to know for certain whether tax savings will result with S Corp tax status in comparison to another form of tax status is to perform some “what if” scenarios or analyses, often with the help of a tax advisor or CPA.
What are the requirements to file for S Corp tax status?
The following requirements must be met to qualify for S Corp tax status:
- Only U.S. Corporations are eligible for this status
- Only one stock class is permitted
- 100 shareholders limit (max)
- Individuals, trusts that can provide written consent, and estates are allowed to be shareholders as long as they do not belong to other LLCs
- Valid US Social Security number required
- Fiscal year must finish on Dec. 31
C Corporations vs. S Corporations?
The primary difference between corporation types is how the company’s profits and losses are taxed by the IRS. A C Corp is bound to double taxation, as profits and losses are taxed at both the corporate level as well as on individuals’ federal and state tax returns, while an S Corp passes net income through to its owners’ individual federal and state tax returns only and is referred to as a “pass-through” entity.
An LLC that has elected S Corp tax status with the IRS is taxed in the same manner as a regular C Corp that has elected S Corp tax status; however, a member or owner of an LLC is required to take a W-2 salary, which is subject to self-employment tax. There are advantages and disadvantages with both types of business entity.
How to File
During the incorporation checkout process (see here for more info), you can elect to file as an S Corp during the checkout process.