Demystifying S-Corporation Taxation
The "S-Corp" isn't a business type—it's a tax election. It allows corporations to avoid double taxation by passing income directly to shareholders. Explore how this structure impacts your bottom line, compliance, and tax strategy.
The "Pass-Through" Mechanism
Unlike a C-Corporation, an S-Corp generally pays zero federal income tax at the entity level. Instead, profits (and losses) "flow through" to the shareholders' personal tax returns via Schedule K-1.
Revenue Generation
The business earns revenue and pays expenses.
Information Return (1120-S)
The S-Corp files Form 1120-S strictly to report activity, not to pay income tax.
Schedule K-1
Net profit is divided among shareholders based on ownership % and reported on K-1.
Personal Tax Return
Shareholders pay tax on their individual Form 1040 at ordinary rates.
S-Corp vs. C-Corp vs. LLC
Compare the estimated total tax liability. S-Corps can often save on Self-Employment taxes compared to standard LLCs.
Simulator Inputs
Key Difference
LLC/Sole Prop: 100% of profit is subject to 15.3% Self-Employment Tax.
S-Corp: Only the Salary portion is subject to 15.3% payroll tax. The remaining Distribution is not.
Are You Eligible?
Not every business can elect S-Corp status. The IRS maintains strict requirements.
Eligibility Checklist
1. How many shareholders does the company have?
2. Are all shareholders US Citizens or Residents?
3. Does the company have only one class of stock?
Check Requirements
Answer the questions on the left to determine if your entity qualifies for the S-Corp election (Form 2553).
Entity Comparison Matrix
| Feature | S Corporation | C Corporation | LLC (Default) |
|---|---|---|---|
| Taxation Level | Single (Pass-through) | Double (Corp + Shareholder) | Single (Pass-through) |
| Self-Employment Tax | Only on Wages (Savings Potential) | N/A (Payroll taxes apply to wages) | On 100% of Net Earnings |
| Ownership Restrictions | Max 100 shareholders, US Residents only | No limits, Global ownership allowed | No limits |
| Classes of Stock | One Class Only | Multiple Classes (Pref/Common) | Flexible Membership Interests |
| Admin Complexity | High (Payroll, Meetings, Minutes) | High (Complex reporting) | Low to Medium |