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 (or not).

What is an S Corp? The Basics.

First things first: an S Corp is a special type of tax entity that lets income, deductions, and tax credits “pass through” directly to its shareholders. This means the company itself doesn’t pay federal income tax—shareholders do. So, to answer your question in short, S Corps do not have a specific tax rate because they do not pay tax! That easy!

How S Corp Taxes are Calculated?

I am sure, you next question is about who pays S Corp taxes? Well, I am sorry to disappoint you, but it is you, my reader. Here is how it works: 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, the K-1 document gets entered into your individual return, and all information from the K-1 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.

The Main Idea of Pass-Through Taxation.

As you can see, in most cases, the S Corp itself does not pay federal income tax. Shareholders report their share of the company’s profits on their individual tax returns. Individuals are taxed according to their personal income tax rates, which range from 0% to 37% (as of 2024), depending on their income level. No one can really tell you how much you will pay on your S corp level because it depends on your individual circumstances.

For example, if you have other income besides the S Corp’s, and that income is high, your S Corp's income and other income will be combined together on your personal return, and your S Corp income may be bumped into a higher marginal tax bracket. Oops!

However, if you are dirt poor, your S Corp income won’t be combined with significant amounts of other income and you will be taxed at a lower rate.

By the way, the same applies to losses. If the business has a loss, that loss is passed onto your individual return and it will offset other income, lowering your overall tax bill.

A Professional Disclaimer:

In some cases, S Corps do get taxed on the federal level as well, but it is pretty rare, and if you want to learn more about these situations, you can read about them here.

S Corp State Tax Rates.

Sometimes states do have their own tax rates for 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 does not really pay taxes on federal level, the same isn’t always true at the state level. Some states, like California, might tax both the S Corp first and then their shareholders on your personal level.

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 what state you live in. 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 S Corp owners with their taxes and accounting. If you ever need help, please reach out! You are welcome to check out our services here.