S-corporation tax explanation

An S corporation is technically a hybrid business structure that has characteristics of both a corporation and a partnership technically it operates as a corporation but unlike an actual S corporation it is not subject to double taxation since it is the shareholders and not the corporation itself who pay federal income tax on the business profits this is why you sometimes hear people say that this is a flow-through or a pass-through entity even though its taxes flow through to its owners and an S Corporation must still file an annual corporate tax return

If you're not sure how you can structure your business in an S corporation by the way, please read this article next is a straightforward process

The name itself as Corporation might be misleading because most corporations deal with double taxation this means that the business is responsible for paying income tax on its earnings and then the shareholders pay a second tax when they receive dividends from the corporation but an s-corporation is different in that regard because it doesn't pay any tax to the Internal Revenue Service at all its income and deductions pass through to each and every shareholder to be reported on their personal income tax returns in proportion to the respective shares of ownership and s-corporation does not pay income tax, but the IRS still requires it to file an annual tax return on IRS Form 1120s

This tax form is for information purposes only basically it shows a summary of the businesses earnings and expenses in addition to the form of the 1120s the S corporation is also responsible for preparing a separate report K1 report which is prepared for each shareholder to report their respective share of earnings and deductions on their own tax returns

So at the end of the year, every owner of an S corporation will have a copy of their K-1 report so when you as an S corporation owner are ready to file your taxes you will need to incorporate the amounts reported on your K-1 into your own income tax return for example when you receive the K-1 with let's just say ninety thousand dollars in income and let's say sixty thousand dollars in deductions your personal income tax return will include an additional thirty thousand dollars of taxable income from the business that you are responsible for paying taxes on since you include these amounts on your own tax return you must follow the appropriate deadlines for your form 1040 which is April the 18th 2023 for 2022 tax returns