Paying Taxes on Your S Corporation Income

An S Corporation does not pay federal income tax at the corporate level because it is a pass through entity that sends income, losses, deductions, and credits directly to its shareholders. Each shareholder reports their share of the S Corporation activity on their personal tax return based on their ownership percentage, and pays tax at their individual income tax rates. The S Corporation files an informational return on Form 1120-S each year and sends each shareholder a Schedule K-1 showing their allocated share of the company results. S Corporation income that flows through to a shareholder who is not also an employee is generally not subject to self-employment tax, which is one of the main tax advantages of the structure. However, shareholders who also work in the business as officers must pay payroll taxes on their W-2 wages, even though the remaining pass through income is not subject to those taxes.