Skip to main content

eFile your Form 941 for Q2 by July 31, 2025 to avoid penalties. eFile 941 Now

Generic selectors
Exact matches only
Search in title
Search in content
Post Type Selectors
post
Filter by Categories
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
Z

S-Corporation (S-Corp)

An S-Corporation (S-Corp) is a US business entity that combines corporate liability protection with pass-through taxation under IRS Subchapter S. The following is an exhaustive glossary of terms, regulations, and compliance. 

 

Core Definitions 

Term Definition
S-Corporation A legal entity electing IRS Subchapter S status (on Form 2553) to pass income, deductions, and credits to shareholders, avoiding double taxation.
Pass-Through Taxation A tax system that transfers business income to individual shareholders’ tax returns to exclude federal corporate income tax.
Shareholder A person, trust, or estate that owns shares in an S-Corp. Limited to 100 shareholders, all of whom must be U.S. citizens or residents.
Form 1120-S The IRS form to file an S-Corp’s income, losses, deductions, and credits. Shareholders get Schedule K-1 to report their share.
Reasonable Compensation A mandate that shareholder-employees receive a market-rate salary subject to payroll taxes (FICA), avoiding IRS reclassification risk.
Subchapter S Election The formal process of making the S-Corp election by filing Form 2553 with the IRS within 75 days of incorporation.

 

Tax and Compliance Terms 

Term Definition
Schedule K-1 A report issued to shareholders detailing their allocable share of the S-Corp’s income, deductions, and credits for reporting on their personal tax return.
Basis Calculation An investor’s interest in the S-Corp used to determine taxable gains or losses on sale or distribution.
Built-In Gains Tax A 21% federal tax on S-Corps disposing of assets that appreciated during five years from C-Corp conversion.
Accumulated Earnings Tax A penalty tax imposed if the IRS finds an S-Corp earns more than is needed for the business.

 

S-Corp vs. LLC Taxed as S-Corp 

Element S-Corporation LLC Taxed as S-Corp
Legal Structure Issued stock formal corporation. Flexible S-Corp LLC structure using Form 2553.
1099 Reporting No—corporations exempt from 1099-MISC on services. Yes, if the LLC is treated as a disregarded entity and paid $600+ for services.
Operational Flexibility Must have corporate formalities (e.g., bylaws, board meetings). Has an LLC agreement, with less procedural requirements.

 

IRS Compliance Requirements 

1. Eligibility: 

Maximum of 100 shareholders; no non-resident alien shareholders. 

Single class of stock (variations in voting rights permitted). 

2. Tax Filing: 

  • Form 1120-S filing due March 15; extensions to September 15. 
  • Shareholder Schedule K-1s must be sent by March 15. 

3. 1099 Rules: 

  • Do S-Corps get 1099? Exempt under IRS rules except for an LLC form. 
  • Do LLC S-Corps get 1099? Required if payments for services more than $600 and the LLC is not taxed as a corporation. 

 

Advantages Disadvantages
Prevention of double taxation. More restrictive ownership and operating requirements.
Shareholders have limited liability protection. Greater administrative expenses (e.g., filings, payroll).
Less self-employment tax on distributions. Penalties for mistakes in calculation of salary or basis.

Related terms and Topics

Tools

Blogs

Webinars

Podcasts