Corporate Taxation: How is an S-Corp Taxed?

Discover how an S-Corp gets taxed.

One of the primary reasons why company owners choose S-Corps over C-Corps is tax considerations. C-Corps are taxed on two levels: income earned by the C-Corp and dividends received by C-Corp shareholders. S-Corps are free from corporate earnings taxes. This implies there will be no double taxes. This also implies that owners pay taxes on their personal returns, while the firm transmits profits (or losses) straight to those shareholders. As such, an S-Corp is a “pass-through company,” similar to an LLC.

So, how exactly does it work?

To begin with, an S-Corp must pay its workers a “reasonable compensation,” which is subject to taxes such as Medicare and Social Security. After that, the S-Corp distributes earnings to its stockholders in the form of dividends. These dividends will be taxed as part of their personal federal tax filings by these stockholders.

But there’s one thing you should bear in mind. As a C-Corp, the company may opt to keep its earnings as operational capital. If C-Corp stockholders do not get dividends, they are not taxed. S-Corps shareholders, on the other hand, are taxed regardless of whether they get dividends. As such, S-Corp owners may pay taxes on earnings they never directly receive.