S Corp

If you're a shareholder in an S corporation, your taxes work differently than they would for a sole proprietorship or a traditional corporation. This guide explains what an S corporation is, how S corp income is taxed, and where to report that income on your individual tax return for the 2026 tax year (filed in 2027).

What Is an S Corporation (S Corp)?

An S corporation, often called an S corp, is not a separate type of business entity. Instead, it's a tax election available to eligible corporations and limited liability companies (LLCs).

By electing S corporation status, a business can pass its income, losses, deductions, and credits directly to its owners. This helps avoid the double taxation that often applies to C corporations.

To qualify as an S corporation, a business must generally:

• Be a domestic U.S. entity
• Have no more than 100 shareholders
• Have shareholders who are generally U.S. citizens or resident individuals (with certain limited exceptions allowed by IRS rules)
• Issue only one class of stock

How Are S Corporations Taxed?

Unlike a C corporation, an S corporation usually doesn't pay federal income tax at the business level. Instead, the business files an informational return, and income flows through to the shareholders.

Here's how it works:

1. The S corporation files Form 1120-S, U.S. Income Tax Return for an S Corporation.
2. Profits, losses, deductions, and credits are allocated to shareholders.
3. Each shareholder receives Schedule K-1 (Form 1120-S), showing their share of those tax items.

The shareholder reports this information on their individual tax return.

How S Corp Income Affects Your Individual Tax Return

Pass-Through Income

As an S corporation shareholder, you're generally taxed on your share of the company's income, even if the business doesn't distribute the money to you.

For example, if you own 50% of an S corporation that earns $100,000, you'll generally report $50,000 of pass-through income on your individual return.

Income Is Taxed Only Once

One of the biggest advantages of an S corporation is avoiding double taxation.

With a C corporation:

• The corporation pays corporate income tax.
• Shareholders may pay tax again on dividends.

With an S corporation:

• Business income generally passes directly to shareholders.
• The income is generally taxed only at the individual level.

Salary vs. Distributions

If you work for your S corporation, the IRS requires you to receive reasonable compensation for the services you provide.

This creates two potential types of income:

Wages (Salary)

• Reported on Form W-2
• Subject to Social Security and Medicare taxes
• Reported as wages on your individual tax return

Distributions (Business Profits)

• Generally not subject to self-employment tax
• May not be subject to payroll taxes
• Still reflected in your taxable income through Schedule K-1

The IRS closely reviews compensation arrangements, so paying yourself an appropriate salary is important.

Self-Employment Tax Benefits

Many business owners choose S corporation status because it may reduce self-employment taxes.

Generally:

• Your salary is subject to payroll taxes.
• Additional profits distributed to you as an owner are generally not subject to self-employment tax.

This can create tax savings compared with operating as a sole proprietor or partnership, depending on your situation.

Losses and Deductions

S corporation losses may be deductible on your personal return. However, several limitations may apply, including:

• Stock and debt basis limitations
• At-risk rules
• Passive activity loss rules

You can only deduct losses to the extent allowed under these IRS rules.

Qualified Business Income (QBI) Deduction

Many S corporation shareholders may qualify for the Qualified Business Income (QBI) deduction under Section 199A.

If eligible, you may be able to deduct up to 20% of your qualified business income. Eligibility depends on factors such as:

• Your taxable income
• The type of business
• Wage and property limitations that may apply at higher income levels

How to Report S Corporation Income on Your Tax Return

The forms you'll use depend on the type of income you receive from the S corporation.

Schedule K-1 Income

Your Schedule K-1 (Form 1120-S) reports your share of the corporation's income, deductions, credits, and other tax items.

Depending on what's reported on the K-1, the information may flow to:

• Schedule E (Form 1040), Supplemental Income and Loss for ordinary business income or loss
• Schedule D (Form 1040) and Form 8949 for capital gains and losses
• Other forms and schedules for items such as interest income, dividends, credits, or deductions

Important: You generally must report K-1 income even if the S corporation did not distribute cash to you.

Wages Paid by the S Corporation

If you receive a salary from the S corporation, you'll receive Form W-2.

Your wages are reported on Form 1040 as wage income and are subject to Social Security and Medicare taxes through payroll withholding.

S Corporation Distributions

Most S corporation distributions are not reported separately as taxable income because the underlying earnings are already reported through Schedule K-1.

However, distributions can become taxable in certain situations, such as when distributions exceed your stock basis. Keeping accurate basis records is important for determining the tax treatment of distributions.

Do I Use Schedule C for an S Corporation?

No. Schedule C, Profit or Loss From Business, is generally used by:

• Sole proprietors
• Independent contractors
• Single-member LLCs that have not elected corporate tax treatment

If your business has elected S corporation status, business income is generally reported through Form 1120-S and Schedule K-1 rather than Schedule C.