What Is the S Corp Tax Rate? Let's Make It Simple!
The S Corp tax rate can be a bit tricky to navigate, but don't worry—this blog breaks it all down for you! We'll walk through how S Corps are taxed, what those tax rates really mean, and why choosing the S Corp structure might be a game-changer for your business.
What is an S Corp? The Basics.
First things first: an S Corp is a special type of corporation that lets income, deductions, and credits “pass through” directly to its shareholders. This means the company itself doesn’t pay federal income tax—shareholders do. This "pass-through taxation" is one of the major perks of the S Corp structure, and it could help you save big on taxes.
How Does the S Corp Tax Rate Work?
The S Corp tax returns are due on March 15th, and these tax returns are prepared before individual returns, which are due April 15th. As a part of tax return preparation, the S Corp produces a special tax document called Schedule K-1, which has the shareholder’s Social Security number, name, and address. Later on this document gets entered in an individual return, and all information from the K-1 magically flows to the individual tax return. So, instead of paying corporate tax rates (which could be high), the income is taxed just like your personal income, potentially lowering your overall tax burden.
If the business has a loss, this information also flows to the shareholder's return and creates a loss on the individual level.
S Corps and Pass-Through Taxation.
As you already figured out, in most cases, the S Corp itself does not pay federal income tax. Shareholders report their share of the company’s profits or losses on their individual tax returns, based on their percentage of ownership. They are taxed according to their personal income tax rates, which range from 10% to 37% (as of 2024) depending on their income level. No one can really tell you the S Corp's tax rate because it depends on the individual circumstances.
For example, If you have other income—say, a regular paycheck (W-2) or capital gains from selling stocks—those all combine on your individual tax return. This means your tax rate could vary depending on your total income.
The same applies to losses. If the business has a loss, that loss is passed through to your individual return and could help offset other income, lowering your tax bill.
A Quick Side Note:
In some cases, S Corps get taxed on the federal level as well, but it is very rare, and if you want to learn more about these situations, you can read about them here.
S Corp State Taxes.
Please don’t forget that states also get their own state K-1 and tax shareholders as well.
Besides taxing shareholders on their individual level, some states decide to tax S Corps at their entity level and impose additional taxes, fees, or franchise taxes on S Corps.
For example:
- California imposes a 1.5% franchise tax on S Corp net income, with a minimum $800 annual tax. Want to know more about California’s rules for S Corps? Check out the details here.
- New York has a separate corporate tax rate for S Corps, but shareholders still report income on their personal tax returns.
So, yes, while it's true that S Corps generally avoid "double taxation" at the federal level, the same isn’t always true at the state level. Some states, like California, might double-dip with taxes on both the S Corp and the shareholders.
Self-Employment Taxes for S Corp Shareholders.
While S Corps pass all income to their shareholders, shareholders who work for the business are also able to save on self-employment taxes. Self-employment taxes (Social Security and Medicare taxes) are 15.3% on top of regular taxes. However, one of the key benefits of the S Corp structure is that only the salary paid to shareholder-employees is subject to self-employment taxes. The remainder of the income is not subject to these taxes. You are welcome to read up on this subject here.
In Summary:
The S Corp tax rate is all about how much money you make and where you live. While S Corps themselves don't typically pay federal taxes, shareholders pay taxes at their individual rates, and certain states may charge additional fees or taxes. Plus, the self-employment tax savings could be a huge advantage if you’re drawing distributions from your business.
And now a little bit of self promotion. We are a boutique virtual CPA firm that helps business owners with their taxes and accounting. If you ever need help, please reach out! You can also check out our services here.