How is S Corporation taxed?

Question

I am very confused on how S Corps are taxed.

1. Can shareholders take only draws? or do they have to do the whole emoloyee process for themselves? (sign up with L&I and all and pay quarterly and double all the amounts and all).

2. Do S Corps pay un-employment tax?

3. Also what is the whole deal with the reasonable salary thing? you are limited on what to pay yourself?

4. Do S Corp pay estimated taxes?

Answer 1

S-Corps do not federal income tax.  Profits are passed through to the shareholders in proportion to the ownership percentage.

1.  If the shareholders are employees they are paid wages or salaries throughout the course of the year.  

2. If they have any employees, yes.

3.  The IRS requires you to pay reasonable and competitive salaries.  (I think this is because an S-Corp is no more than a tax filing option and the general corporate tax laws require that corporate officers in small corporations don't avoid corporate income tax by overpaying themselves.  When they made S-Corps legal congress didn't change this other section of the tax laws.)

4.  No.  Since the profits are passed on to the shareholders they are the ones who pay any and all federal taxes.

Hope this helps

Jerry-the-bookkeeper