Question

Describe the taxes that apply to S corporations

Answer 1

The state taxation applies to S corporation and thus rules regarding S corporation taxation varies from state to state. S corporation, a pass-through tax entity, is not liable to pay federal income taxes. The entire income, losses, deductions, and credit are transferred to shareholders for taxation purpose. These are reported by shareholders for their personal income tax return. So no income tax is paid by the S corporation at the corporate level. Therefore, like C Corporation there is no double taxation. Only tax is paid by shareholders according to the applicable individual income tax rate. It is possible to reduce self-employment tax in S corporation by dividing the income into two components, that is, salary and distribution of business profit. Salaries received is subject to social security and Medicare taxes which is to be paid equally by shareholders and corporation. On the other hand, no tax or no self-employment tax is to be paid on the distribution of profit.