S corporation status can reduce self-employment tax, but it comes with a recurring filing calendar that is stricter than a sole proprietor's. Missing it is expensive because the penalty is built for pass-through entities and does not depend on tax being owed. Here are the requirements in the order you will meet them.
What Form 1120-S is
The IRS describes Form 1120-S as the form used to report the income, gains, losses, deductions, and credits of a domestic corporation or other entity covered by an election to be an S corporation. The S corporation generally does not pay federal income tax at the entity level. Income and deductions pass through to shareholders on Schedule K-1.
Who has to file
Every corporation or LLC that has a valid S corporation election in effect is generally required to file Form 1120-S for each year of the election, even if it had little or no activity. Filing a zero-activity return is far cheaper than the penalties for skipping it. If you are unsure whether your election is valid, see late S-corp election relief.
What goes into the return
- Income and expense schedules built from your reconciled books.
- Officer compensation, which must reflect reasonable pay for working shareholders. See S-corp reasonable salary.
- Schedule K reporting items that pass through to shareholders.
- Schedule K-1 for each shareholder, a copy of which the S corporation files with the IRS.
- Balance sheet and a reconciliation of book income to tax income, subject to size thresholds.
- Additional schedules in some cases, such as Schedule B-1 for certain shareholder types, Schedule D for capital gains, and K-2 and K-3 for international items. Schedule M-3 applies to S corporations with total assets of $10 million or more, according to the IRS.
Deadlines and extensions
Under the Form 1120-S instructions, a calendar-year S corporation is generally due by the 15th day of the third month after the year ends, moved to the next business day when it falls on a weekend or holiday. An automatic extension is available by filing Form 7004 by the original due date. Extending does not change shareholders' own deadlines in a way that helps them, since their returns depend on the K-1s. Confirm exact current-year dates in the IRS instructions. State returns may have different dates.
The penalty for filing late
A late or incomplete Form 1120-S draws a penalty calculated per shareholder for each month it is late, up to a maximum number of months. The amount is adjusted annually, so verify the current figure in the instructions. This penalty applies even when no tax is due. Relief may be available. See IRS penalty abatement help and unfiled business tax returns.
Filings that sit alongside the return
- Payroll: Form 941 quarterly, Form 940 annually, and Forms W-2 for working shareholder-employees. See small business payroll services.
- Information returns: Forms 1099 for contractors where required.
- State returns and entity-level taxes or fees, which vary by state.
- Shareholders' personal returns, which use K-1 data.
Shareholder basis and distributions
Each shareholder tracks stock and debt basis. Basis determines whether distributions are tax-free and how much loss can be deducted. S corporations must also follow the one-class-of-stock rule, which means distributions need to be proportionate to ownership. Disproportionate distributions can jeopardize the election, so talk to your preparer before making them.
A year-round checklist
- 1Run payroll for working owners throughout the year.
- 2Reconcile the books monthly.
- 3Review reasonable salary and distributions before year-end.
- 4Collect shareholder and loan records after year-end.
- 5File Form 1120-S, or Form 7004, by the deadline.
- 6Deliver K-1s promptly so shareholders can file.
For the cost side of preparation, see S corp tax preparation cost. If your decision is between return types, read Form 1120-S vs Form 1120. Our tax preparation service prepares Form 1120-S with shareholder returns. To schedule a consultation, tell us how many shareholders you have and your states.
