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Who pays IRS taxes on company (S corp) income (the corporation or the shareholders?)

This year I am attempting to file our corporate taxes with Turbo Tax for business.  In looking at my expenses, I noticed that the accountant who did last year's taxes, listed the payment for the IRS tax due as a disbursement to the shareholders (my husband and I own 100%),   I thought the company would pay any taxes due (Fed and State) and my husband and I would pay our own personal taxes including any disbursements).  

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Who pays IRS taxes on company (S corp) income (the corporation or the shareholders?)

I think your accountant confused you with his accounting.

An S-Corp is a "pass through" entity, meaning that all income and expenses "pass through" the S-Corp to the shareholders.  This is irrespective of any cash actually changing hands.  An S-Corp does not pay income taxes on its own because the S-Corp, for income tax purposes, has no income.  It's all been distributed to shareholders via Schedule K-1.  The shareholders then enter the information off their Schedule K-1's in their own income tax returns.

Accordingly, cash passed back to the shareholders that's not in "paycheck" form is not taxable income to the shareholders; it's a reduction of each shareholder's equity on the books of the S-Corp and a reduction in shareholders' basis in their investment of the S-Corp on the books of the shareholders. 

I assume your accountant did your personal income tax returns as well as the S-Corp's, and included the S-Corp's income on your Form(s) 1040.  Sounds to me like the accountant also prepared the checks to the IRS for your personal income tax return(s), (if that's the payee name on the checks), and took that cash out of the S-Corp, accounting for that cash as a "distribution to shareholders."

Tom Young

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3 Replies
Carl
Level 15

Who pays IRS taxes on company (S corp) income (the corporation or the shareholders?)

Generally, an S-Corp is a pass-through entity where taxes are deferred until the money "passes through" the business to a taxable entity... such as you personally. Now if your S-Corp has employees, then the S-Corp would be paying the employer side of the wages paid to employees. With an S-Corp, it is perfectly possible for an owner or shareholder (such as yourself) to also be a W-2 employee.
As for distributions reported on a K-1, I think the S-corp pays the corporate side of taxes (medicare and SS) and the recipient of the K-1 pays their side. It's perfectly possible for the S-Corp to pay the K-1 recipient's taxes "on behalf of" said recipient. But I don't see any place on the 1120-S K-1 for any taxes paid on the recipient's behalf. .

Who pays IRS taxes on company (S corp) income (the corporation or the shareholders?)

@Carl the S corp never pays taxes attributable to K-1 income that is passed through to the shareholder.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.

Who pays IRS taxes on company (S corp) income (the corporation or the shareholders?)

I think your accountant confused you with his accounting.

An S-Corp is a "pass through" entity, meaning that all income and expenses "pass through" the S-Corp to the shareholders.  This is irrespective of any cash actually changing hands.  An S-Corp does not pay income taxes on its own because the S-Corp, for income tax purposes, has no income.  It's all been distributed to shareholders via Schedule K-1.  The shareholders then enter the information off their Schedule K-1's in their own income tax returns.

Accordingly, cash passed back to the shareholders that's not in "paycheck" form is not taxable income to the shareholders; it's a reduction of each shareholder's equity on the books of the S-Corp and a reduction in shareholders' basis in their investment of the S-Corp on the books of the shareholders. 

I assume your accountant did your personal income tax returns as well as the S-Corp's, and included the S-Corp's income on your Form(s) 1040.  Sounds to me like the accountant also prepared the checks to the IRS for your personal income tax return(s), (if that's the payee name on the checks), and took that cash out of the S-Corp, accounting for that cash as a "distribution to shareholders."

Tom Young

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