How Does the Shareholder of an S Corporation Pay for Taxes?

How Does the Shareholder of an S Corporation Pay for Taxes?
••• Creatas/Creatas/Getty Images

Although S corporations operate as corporations, they avoid double taxation at the corporation and shareholder level. S corporations file corporate tax returns but do not pay taxes. An S corporation’s shareholders use their personal checks or bank accounts to pay the taxes on their relative share of the S corporation’s net income.

Subchapter S Corporation

S corporations are corporations that elect subchapter S tax status under IRS regulations. The IRS treats S corporations as a combination of a corporation and a partnership. Like a partnership, the S corporation's net income flows through to the shareholders and is taxed only at the individual shareholder level. The shareholder pays income taxes on any business income as part of her personal tax return.

Form 1120S and Schedule K-1

S corporations must file Form 1120S. This form provides the IRS with information regarding the S corporation's income, losses, deductions and credits. S corporations must also prepare Schedule K-1, Shareholder's Share of Income, Deductions, Credits and send a copy of Schedule K-l to each shareholder. These forms are due on March 15 for fiscal years coinciding with the calendar year; otherwise, the due date is the 15th day of the third month following the company’s fiscal year end.

Shareholder's Personal Return

Each S corporation shareholders is liable for his proportionate share of the corporation's income, whether or not the income was actually distributed. If your S corporation had net income or a net loss, include your share on your personal tax return, Form 1040. If you have overall net taxable income, submit a check or electronically transfer any monies due to the IRS.

Self-Employment Income and Potential Loss Limitations

The IRS does not consider S corporation income as self-employment income and is therefore not subject to self-employment tax. If your company had net losses, you may not be able to personally claim the full amount of the loss and deduction shown on Schedule K-1 as limitations based on basis, at-risk amounts and passive activity apply. Check with your tax advisor if you are unsure how much you can deduct.


For example, your S corporation has four shareholders, all owning 25 percent each. Your company generates $2 million in revenue and $1.8 million in expenses. Your S corporation submits Form 1120S to the IRS with the four 10 K-1s attached and sends the appropriate K-1 to each investor. Each investor would report $500,000 in revenue and $450,000 in expenses on his personal tax return. The $50,000 in net income would increase each investor's adjusted gross income or AGI by $50,000. Each shareholder would offset his AGI by his personal deductions to determine his net taxable income. He would then pay the IRS for any taxes due.