A corporation can file for status, as an “C” or “S” corporation with the Internal Revenue Service and in some States similar filing. Each classification has unique Internal Revenue Tax liabilities to the corporation and shareholders. Also, each type of corporation has advantages and disadvantages. Employees employed by either “C” or “S” corporation, have their own unique income tax responsibilities.
A profit corporation or “C” corporation, income taxes are paid by the corporation and shareholders. A shareholder can be a foreign citizen. Any income losses remain in the “C” corporation and not incurred by any shareholder. Most large corporations, having more than seventy-five shareholders prefer “C” corporation filing. These companies expect to distribute dividends and any accumulation of capital gains to shareholders. Owners of a “C” corporation are not liable for any debts of the business, in case of bankruptcy. Main disadvantage for a “C” corporation: Income taxes are paid twice, when the corporation earns a profit, and when shareholders receive income distribution, from dividends and capital gains. Also, any corporate loss, may not be passed through to shareholders, which to claim, against any taxable income.
Employees working for a “C” Corporation maybe offered a Code Section 125/Flexible Benefit plan or Cafeteria Plan (In 1978, the United States Congress passed legislation, known as the Revenue Act of 1978, and a portion of the legislation added Section 125 to the Internal Revenue Code). This entitles employees, and their families to receive a variety of health benefits, offered by the corporation, and certain amount of payroll deductions are taken on a before-tax basis, which pays part of the expense or employer-sponsored salary reduction programs. According to Federal Income Tax law, employees making changes in the Section 125 benefit elections, except during the open enrollment period, which is effective the following July first. Changes made effecting 125/Flexible Benefit plan, include status regarding marriage, divorce, birth or death. Also, coverage discontinued due to loss of employment, age or other reasons. A chapter “C” corporation may offer, The Dependent Day Care (DD) plan which allows employees to contribute pretax dollar amount, related to the care of dependent children, under twelve years old. The amount is deducted from an employee salary, which will reduce taxable income, and payroll taxes such as state and federal income tax and Social Security tax.
A “S” Corporation filed with Internal Revenue Service, typically applicable for small businesses, such as retail, consultants, partnerships, sales driven organizations, family businesses or companies maintaining depreciating assets. An “S” Corporations passive income does not exceed 25 percent of the total income, such as annuities, dividends, royalties or other sources. Besides, the “S” corporation, has less than 75 shareholders (A husband and wife considered as one vote), all of the shareholders agree to incorporate the business under an “S” corporation, no nonresident alien shareholders are permitted, the corporation is only incorporated in the United States, only distributes one class of Stock (Excludes any preferred classifications of stock), and abides to other regulations. Shareholders receive any income and deductions from the corporation. The “S” Corporation files Internal Revenue form 1120s, which outlines income, expenses, profits, and losses. The corporation sends once a year to shareholders a K-1 Internal Revenue Tax Form. The form reports the distribution of any income to shareholders, and any loss passed onto the shareholder, from the corporation. The loss maybe an expense, which is a deduction, passed through to the shareholders, regarding a property. The K-1 form is enclosed, in the tax preparation of any shareholder income tax return. An “S” corporation files IRS Form 2553 (Similar type of report for State Income Taxes), which is a quarterly income tax report, before every 15th day of the third month. Before any corporation, can file with IRS Form 2553, the business must present to the State office (Office of the Secretary of the State), Articles of Incorporation, for requesting the status of “S” corporation. The same applies, for a “C” corporation status.