One post tagged with "Tax Guide"

You formed an S-corp to keep your business lean and tax-efficient. But while the "pass-through" concept sounds simple, the reality involves payroll taxes, potential entity-level charges, and crucial state-by-state differences.

Here’s how the taxes actually work for an S-corp in 2025—and how to keep a clean, audit-proof record in Beancount.

What Gets Taxed (and Where)​

The core of the S-corp structure is how it handles profit. It's a three-part system: pass-through income, entity-level taxes, and payroll taxes.

• Pass-Through at the Federal Level: An S-corp generally pays no federal income tax on its ordinary business profit. Instead, that profit (along with other tax items like credits and deductions) flows through to the shareholders via a Schedule K-1. Shareholders report this income on their personal tax returns, whether or not they actually took the cash out of the business. Crucially, this K-1 profit is not subject to self-employment tax.
• But... Entity-Level Taxes Can Apply: The "no corporate tax" rule isn't absolute. In specific cases, an S-corp may owe tax directly. The most common triggers are the built-in gains (BIG) tax (for recent C-corp conversions) and the excess net passive income tax.
• Payroll Taxes Are Real: This is the most important rule for shareholder-employees. If you work in your business, you must be paid reasonable compensation as W-2 wages before you take any tax-favored distributions. These wages are subject to FICA (Social Security & Medicare) and income tax withholding, just like any other employee's pay.

Payroll, at a Glance (2025) payroll​

For any shareholder-employee, you'll be running payroll and filing standard payroll tax forms, including quarterly Form 941 (for income tax withholding and FICA) and annual Form 940 (for federal unemployment tax, or FUTA).

The key 2025 rates are:

• Social Security (OASDI): The wage base is $176,100. The tax rate is 6.2% for the employee and 6.2% for the employer on wages up to this cap.
• Medicare: There is no wage cap. The rate is 1.45% for the employee and 1.45% for the employer on all wages.
• Additional Medicare Tax: A 0.9% tax is withheld from an employee's wages that exceed $200,000 in a year. There is no employer match for this portion.

Entity-Level Taxes You Might See​

While less common, you must be aware of taxes the S-corp itself might owe.

• Built-in Gains (BIG) Tax: If you converted your business from a C-corp to an S-corp, you face a 5-year recognition period. If you sell appreciated assets that the company held during its C-corp days within this window, the S-corp itself will owe a corporate-rate tax on those gains. This is calculated on Schedule D of Form 1120-S.
• Excess Net Passive Income Tax: This applies if your S-corp has accumulated earnings & profits (AE&P) from a prior life as a C-corp and its passive income (like rents, royalties, and interest) exceeds 25% of its gross receipts.
• Quarterly Estimates for These Taxes: If you expect the total of BIG tax, passive income tax, and certain other recapture taxes to be $500 or more, the S-corp must make quarterly estimated payments. For 2025, the calendar-year due dates are April 15, June 16, September 15, and December 15.

State & Local Gotchas 🗺️​

Never assume federal rules apply at the state or city level. Tax treatment varies widely.

• California: S-corps must pay an $800 minimum franchise tax each year, plus a 1.5% tax on net income.
• New York City: NYC does not recognize the S-corp election. A federal S-corp is generally subject to the full NYC General Corporation Tax.
• Elective Pass-Through Entity (PTE) Taxes: As a workaround to the federal $10,000 SALT deduction cap, many states now allow S-corps to elect to pay state income tax at the entity level. The rules are complex and shifting—talk to your CPA before making a PTE election.

What the Owners Pay​

As a shareholder, your personal tax picture is directly linked to the S-corp's performance.

• K-1 Income on Your 1040: You will report the income, losses, deductions, and credits passed through to you on your Schedule K-1 on your personal Form 1040.
• Quarterly Estimated Taxes: Since your K-1 income doesn't have taxes withheld, you will likely need to make personal quarterly estimated tax payments to the IRS using Form 1040-ES to avoid underpayment penalties.
• The QBI Deduction (Section 199A): Your pass-through income may qualify for the valuable Qualified Business Income (QBI) deduction, which can be up to 20% of your business income. At higher income levels, this deduction can be limited by the amount of W-2 wages the S-corp pays—making your "reasonable compensation" figure even more important.

Baseline Filing & Forms​

At a minimum, your annual compliance will include:

• Form 1120-S: The S-corporation income tax return.
• Schedule K-1: For each shareholder.
• Payroll Forms: Quarterly 941s, annual 940, and W-2s/W-3s for employees.
• Form 1099-NEC: For payments of $600 or more to most independent contractors.

Beancount: Map It So You Never Wonder “Where Did That Go?”​

A clear chart of accounts is essential for tracking these moving parts.

Starter Accounts​

Assets:Bank:Operating
Assets:PrepaidTax:Federal            ; For S-corp level estimated payments
Expenses:Payroll:Wages
Expenses:Payroll:Employer:SocialSecurity
Expenses:Payroll:Employer:Medicare
Expenses:Payroll:Employer:FUTA
Expenses:Tax:Federal:S-Corp          ; For BIG/passive income tax expense
Liabilities:Payroll:Withholding:{Federal,SocialSecurity,Medicare}
Equity:Distributions

Transaction Examples​

Run Payroll (Company side + withholdings)

2025-02-28 * "Payroll - February"
  Assets:Bank:Operating                        -10350.00 USD
  Expenses:Payroll:Wages                         12500.00 USD
  Expenses:Payroll:Employer:SocialSecurity         775.00 USD
  Expenses:Payroll:Employer:Medicare               181.25 USD
  Liabilities:Payroll:Withholding:Federal        -3000.00 USD
  Liabilities:Payroll:Withholding:SocialSecurity  -775.00 USD
  Liabilities:Payroll:Withholding:Medicare        -181.25 USD

Owner Distribution (Non-wage)

2025-03-10 * "Shareholder distribution"
  Assets:Bank:Operating                         -5000.00 USD
  Equity:Distributions                           5000.00 USD

Corporate-Level Estimated Tax (If applicable)

2025-04-15 * "1120-S entity-level estimate (BIG/passive tax)"
  Assets:Bank:Operating                         -1200.00 USD
  Assets:PrepaidTax:Federal                      1200.00 USD

Marking Key Filing Dates

2026-03-15 note "E-filed 2025 Form 1120-S; furnished K-1s to all shareholders."

Sanity Checks (bean-query)​

Use queries to ensure your records are sound.

Wages vs. Distributions YTD (Reasonable Comp Reality Check)

SELECT account, SUM(position)
WHERE (account ~ "Expenses:Payroll:Wages" OR account ~ "Equity:Distributions")
  AND year = 2025
GROUP BY account;

Did We Record the K-1 Handoff?

SELECT date, narration WHERE narration ~ "K-1";

Practical Tips (So the IRS Doesn’t Call) ✅​

1. Document "Reasonable Compensation." Keep a simple memo with your job duties, time allocation, and links to market salary data. Pay this amount via formal W-2 payroll.
2. Separate Wages and Distributions Cleanly. Never mix them. Your Beancount ledger should make the distinction obvious.
3. Watch State Rules. Be aware of minimum taxes (like in CA) or S-corp non-recognition (like in NYC).
4. Revisit Estimates. If your income changes significantly mid-year, adjust both your personal 1040-ES and any S-corp level estimated payments.

This guide provides general information, not tax advice. Every business situation is different. Always consult with a qualified CPA for guidance specific to your circumstances.