What Is an S Corporation (Taxes)?

An S corporation is a business entity that passes income, losses, and deductions through to its shareholders' personal tax returns — avoiding the double taxation of a C corporation. A key benefit: owner-employees only pay self-employment tax on their salary, not on additional profit distributions. The IRS requires S corp owners to pay themselves a "reasonable salary." S corps are limited to 100 shareholders, all of whom must be U.S. citizens or residents. Schedule K-1 reports each shareholder's share of income.