Definition of an S Corporation

S Corporations are a special class of corporations whose income is not taxed at the business level. Instead, the individual shareholders in the S Corp are responsible for paying the corporation's taxes.

• Individual shareholders cannot be partnerships or corporations.
• Unlike C Corps, S Corps pay no income tax at the entity level. Instead, all profits and losses are passed to the shareholders, who then pay taxes (or take deductions for losses). Thus, S Corp shareholders bear all tax liability.
• Shareholders in an S Corp receive dividends and are (nominally) not W-2 employees, but can receive normal wages. The S Corp will report each shareholder's share of profit and loss on Schedule K-1 (Form 1120S).
• Payments towards the cost of benefits for shareholders who own more than 2% of an S Corp (owners, treated by the IRS as partners in a partnerships) are considered part of the S Corp owner's income. These owners pay Federal income taxes on the cost of their benefits.
• S Corps may also have W-2 employees who are not also shareholders. If so, the S-Corp is subject to normal Federal (Income, FICA, FUTA) and State employment taxes (Income, SUI, SDI, etc.) on wages paid to employees, and will file Forms 940 (FUTA Tax return) and 941 (Quarterly Return for Income and FICA taxes) for amounts withheld.

For more information, see the IRS guide to S Corporations.