S Corp

An S corporation (S corp) is a legal entity that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This election allows S corps to avoid double taxation on corporate income. The S Corp designation was created to provide the benefits of incorporation while allowing the profits and losses to be passed through to the shareholders, similar to a partnership.

What are the tax deadlines for S corps? 

S corps must file their tax return by March 15 for calendar-year corporations, with an option to extend the deadline to September 15 using Form 7004. If the S Corp has employees, it must comply with payroll tax deadlines, including Form 941 due at the end of the month following each quarter and Form 940 due by January 31. Additionally, S Corps must issue Schedule K-1 forms to shareholders by March 15. State tax deadlines and obligations, such as franchise taxes, may also apply depending on the location.

Tax regulations and implications for an S corp

S corps operate under a pass-through taxation system, meaning the corporation itself is not taxed on its income. Instead, income, losses, deductions, and credits are passed through to shareholders, who report these items on their personal tax returns. This allows shareholders to potentially lower their overall tax burden by utilizing individual tax rates rather than corporate tax rates.

Owners of S corps who are also employees must be paid a reasonable salary, which is subject to federal employment taxes, including Social Security and Medicare. However, any remaining profits can be distributed as dividends, which are not subject to payroll taxes. This structure allows S corp owners to reduce their payroll tax liability while still receiving distributions from the company’s profits.

S corps must meet specific IRS filing requirements, including filing Form 1120-S annually. Additionally, shareholders receive Schedule K-1s, which outline their share of the corporation's income, deductions, and credits. For retirement purposes, K-1s from an S corp are not eligible compensation. Only W-2 income for S corps can be used for retirement plans. One key benefit of S corps is that shareholders are not subject to self-employment taxes on their share of the corporation’s profits, further enhancing potential tax savings compared to other business structures like sole proprietorships or partnerships.

401(k) benefits for S corps

S corps offer several advantages when it comes to setting up and managing 401(k) retirement plans for their employees and shareholders. Here are some of the key benefits:

1. Tax-deferred savings for owners and employees

S corp employees, including owner-employees, can contribute up to the annual 401(k) contribution limits only if they have eligible compensation (note, K-1’s do not count). These contributions are tax-deferred, meaning they reduce taxable income and grow tax-free until withdrawn in retirement. 

Additionally, employer contributions, such as matching or profit sharing, are tax-deductible for the S corp. This can lower the overall taxable income of the company. 

2. Flexibility in owner compensation and profit distributions

S corp owners who receive W-2 wages can contribute to their 401(k) plan based on their salary, as only W-2 compensation is eligible for deferral. Distributions of profits from the S Corp are not considered W-2 wages, so owners often balance their compensation to maximize 401(k) contributions while keeping personal tax liability lower. 

Unlike sole proprietorships or partnerships, S corp owners can enjoy zero self-employment taxes on their share of corporate profits. Only W-2 wages are subject to payroll taxes, allowing owners to structure their income in a way that reduces tax liability while maximizing retirement savings.

3. Profit-sharing and enhanced retirement contributions

S corps can incorporate both employer contributions, including matching and profit-sharing features, into their 401(k) plans, allowing the business to contribute a percentage of profits or match employee deferrals. These contributions are tax-deductible for the business, benefiting both owners and employees by increasing overall retirement savings. In 2024, the total contribution limit (including employee deferrals, employer matching, and profit-sharing contributions) is $66,000, or $73,500 for those aged 50 or older. This provides S Corp owners a significant opportunity to maximize retirement savings while optimizing tax advantages for the company.