The simple answer is: there is no federal income tax levied on an S-corporation. S-corporations are pass-through entities. An S-corporation files a business tax return (Form 1120-S) to report the profit it generated for the year, but this profit is not subject to any tax rate. Instead, the profit is passed through to its owner, who then reports that profit on the personal income tax return (Form 1040) and pays regular income tax on that business income (as well as any other income the taxpayer received). If the S-corporation has more than one owner, the profit reported on Form 1120-S is allocated among the owners in proportion to their percentage ownership interest in the S-corporation.
However, an S-corporation may be subject to other types of taxes:
● Payroll taxes: an S-corporation must pay employment taxes on its employees’ compensation. The S-corporation must withhold its employees’ federal and state income taxes, pay Social Security and Medicare taxes, and pay unemployment taxes. In addition, the IRS requires owners of an S-corporation to designate a "reasonable" amount of profits as salary, meaning the S-corporation owners will also be subject to Social Security and Medicare taxes on this salary. S-corporation owners do not pay Social Security and Medicare taxes on business profits except that portion that is designated as salary, so this is advantageous compared to sole proprietorships and partnerships who must pay Social Security and Medicare taxes on their entire business profit.
● Property taxes: If the S-corporation owns real property, the S-corporation must pay property taxes on this property.
● Sales tax: S-corporations are required to pay state sales taxes in the same manner as other purchasers.
● State taxes: In some states, S-corporations must also pay additional fees and taxes. For example, in California, an S-corporation must pay tax of 1.5 percent on its income with a minimum annual amount of $800.
