Understanding and Filing S Corporation Tax Returns: A Comprehensive Guide
When forming an S corporation, one of the most important decisions is who will handle the tax returns. It is often recommended to engage a tax professional for this purpose due to the complex nature of the tax filings. However, many individuals may decide to handle these tax returns themselves for cost-saving reasons. This article will provide a detailed guide on how to file S corporation tax returns and why seeking professional help is highly advisable.
Why Engage a Tax Professional?
People frequently form S corporations after consulting with tax professionals, who guide them on the advantages and disadvantages of this entity choice. These professionals usually handle the tax returns due to their expertise. However, some individuals forgo professional advice and rely on random advice found online, often provided by unlicensed individuals. Such individuals often believe they are saving money by bypassing the professional. However, they often find out that they have made a significant error. This is especially true when it comes to understanding the intricate details of S corporation tax filings.
What does Filing Taxes Mean for an S Corporation?
It is a common misconception that S corporations pay corporate income taxes. In reality, S corporations pass the income to their owners, who then pay taxes on this income as part of their individual incomes. For instance, in the 2017 tax return, most S-corporation shareholders experienced some benefits. Nevertheless, S corporations are required to file a Form 1120-S with the IRS, which summarizes their income, expenses, and profits. This profit is distributed to the shareholders using a Form K-1. Shareholders then have to report a portion of this profit, proportional to their ownership in the company, on their personal tax returns. Since the 2017 Tax Reform introduced a 20% deduction for qualified business income, the remainder of this income continues to be taxed at individual income tax rates for the shareholder.
Understanding the Tax Structure
Given the progressive tax structure in the United States, the tax on S-corporation income can vary widely based on the individual's income. It is crucial for shareholders to be aware of the various tax implications and rates they may face.
Understanding Form 1120-S and Its Significance
For federal income tax reporting, it is essential to understand the significance of Form 1120-S. However, it is important to note that the process is not limited to just completing the federal return, as state-level income and franchise taxes must also be considered. Additionally, state and federal payroll taxes need to be accounted for. Given the complexity, it is highly recommended to consult a CPA who specializes in such matters. Attempting to handle S corporation tax filings on your own can lead to significant errors and unnecessary financial losses.
Case Studies of DIY Reporting Failures
The stories of DIY S corporation reporting failures are numerous and troubling. For example, a financial consultant ignored a small tax and ended up paying $650 when she should have paid $50. Similarly, an attorney repeatedly submitted incorrect S corporation tax returns for three years, despite having the professional assistance of a tax consultant. Most alarmingly, a business owner almost went to jail due to severe errors in his S corporation tax filings. The IRS ultimately informed him that to avoid prison, he must file only Schedule C for self-employment income for the rest of his life.
It is clear from these examples that professional help is essential for accurate and compliant S corporation tax filings. taxes and compliance in the S corporation context can be intricate, and the stakes are high. Engaging a tax professional can save you from significant financial and legal troubles in the long run.
For detailed guidance on how to file S corporation tax returns, refer to the IRS information on Form 1120S. However, it is strongly advised to consult a tax professional for the specifics of your situation.
Remember, seeking professional help is the best way to ensure accurate and compliant tax filings, thus protecting your business and personal finances. The steps taken now can make a significant difference in the long-term success and prosperity of your S corporation.