Unlike regular (non-S-Corporations) S-Corporations do NOT pay income tax. Instead they are considered pass-through entities.

This means that the business’s profits, losses, and other items of the S-Corporation are passed through to the owners/shareholders in the year earned by the S-Corporation, independent of when payments are made to the shareholders. While this eliminated the double taxation of a regular corporation it also means that shareholders can end up paying tax on income earned by the S-Corporation but not received by them.

Profits from S-Corporations are NOT subject to self-employment (Social Security) taxes like those of partnerships. Unlike partnerships, where owners can’t be included in payroll, S-Corporate officers must receive reasonable compensation as payroll.

S-Corporations must use a calendar year for tax reporting and need to file a tax return by March 15 of each year. They file on form 1120S and supply each shareholder with a K-1, showing their share of S-Corporate income and other items that must be reported on the shareholder’s personal tax return.

For more information see Finding the Right Legal Form for Your Business