Do you own an S Corporation and are wondering if you must make federal quarterly estimated tax payments? Read on to find out.
Generally speaking, an S Corporation usually does not incur any federal income tax. This is because it is what is called a “pass-through entity” for tax purposes. In other words, even though corporate profit does get reported on the federal corporate income tax return, this return (Form 1120S) is really for information purposes only. Rather than have the S Corporation pay the income tax on its profits, those profits are passed on to the shareholders via a form called Schedule K-1. The shareholders must then report the corporate profits from Schedule K-1 on their personal income tax returns, and that’s where any income tax is reported and paid.
So, if an S Corporation does not have any federal income tax, it is not required to make quarterly estimated tax payments. Perhaps that is good news for you!
But, do not overlook the fact that any S Corporation profit will be subject to federal income tax on the shareholders’ personal income tax return, as indicated above. So, even though the corporation may not need to make quarterly estimated tax payments, the shareholders may need to make those payments because of the corporate income reported on the K-1.
If you are an S Corporation shareholder, be sure to include this K-1 income when doing any personal income tax planning. If you are also an employee of the S Corporation, which is often the case with smaller S Corporations in which the shareholders are doing most if not all of the work, do not assume that your payroll withholdings are enough to cover your entire personal income tax liability. You paycheck may show federal income tax withholdings, but this may not be enough for both your W-2 income and your K-1 income.
You are welcome to increase your paycheck withholdings as needed to take care of your tax liability from all income sources, including K-1 income. You are also allowed to make quarterly estimated tax payments to insure you are paying enough federal income tax during the year.
Either way, do not wait until the end of the year to calculate your tax liability and the amount of any additional necessary payments. Be sure to crunch the numbers throughout the year. A savvy business owner will determine income and the associated tax liability at least quarterly. That way, if a quarterly estimated tax payment is needed, you can pay it on time and avoid an underpayment penalty.