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Guide for Business Owners: Understanding the Differences Between Form 1120-S and Form 1040
Guide for Business Owners: Understanding the Differences Between Form 1120-S and Form 1040
Updated over a week ago

Welcome business owners! As we approach the tax filing season, we want to familiarize our members with various tax obligations, including the different tax forms required to file as an S Corp owner. Specifically, it's important to recognize that you cannot file your personal tax return (Form 1040) until you've completed your S Corporation tax return (Form 1120-S). Let's delve into the reasons why and the differences between these forms.

S Corporation Tax Return (Form 1120-S):

What is Form 1120-S?

Form 1120-S is the tax form used by S Corps to report their annual income, gains, losses, deductions, and credits. It shows the IRS how the corporation's income is allocated among its shareholders.

S Corp as a Pass-Through Entity

An S Corp is a pass-through entity, which means that the corporation itself doesn't pay income taxes. Instead, the profits or losses "pass through" to the individual shareholders, who report their shares on their personal tax returns.

Shareholder Wages and Distributions

If you're working in your S Corp, you likely get a salary, which is taxed like any regular job's income. But there's more! You might also get extra money (called distributions) from the company's profits. These aren't treated like a salary, which are typically not subject to employment taxes.

Schedule K-1: Your Personal Piece of the Pie

Each shareholder gets a special form called Schedule K-1 (Form 1120-S). This form breaks down your specific share of the company's financials - how much you made, what expenses you can claim, deductions, and credits. You'll need this completed form when you're ready to file your own taxes, as it helps you report everything accurately on your personal tax return (Form 1040).

Form 1040: Your Personal Tax Story in a Nutshell

What's Form 1040?

Form 1040 is the standard federal income tax form used by individuals, like you, to tell the IRS about all the money you’ve made during the year. This includes your job's salary, money earned from side gigs, investments, and even those surprise earnings like a bonus or dividends. If you're part of an S Corp, you’ll also include what you've earned from there too.

About Self-Employment Tax

If you're getting paid from your S Corp (like a salary), this income is treated much like any job income. You'll pay regular taxes, like Social Security and Medicare, on it.

Keeping all of this Straight

  • Entities vs. Individuals: Remember, Form 1120-S applies to the corporate entity (your S Corp), while Form 1040 is for your personal taxes as an individual, and in order to file your personal taxes, you need to first complete your S Corp tax return.

  • Separate Filings: You must file your business and personal returns separately.

  • Tax Filing Deadlines: Be aware of different filing deadlines. Form 1120-S comes first because the personal return must include the K-1. You have about another month to file Form 1040.

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