S-corporation Tax CPA Boulder
Form 1120S is the form used for an S-corporation’s annual tax return. As with a partnership, Schedules K and K-1 are used to show how the business’s different types of income and deductions are allocated among the owners.
The big benefit of being an S-corp is that shareholders do not have to pay self-employment tax on their share of the business’s profits.
The big catch is that before there can be any profits, each owner who also works as an employee must be paid a “reasonable” amount of compensation (salary). This salary will be subject to Social Security and Medicare taxes to be paid half by the employee and half by the corporation. As a result, the savings from paying no self-employment tax on the profits only kick in once the S-corp is earning enough and there are profits to be paid out after paying the mandatory “reasonable compensation.”