Taxation:

• Corporation files its own state and federal income tax returns (IRS Form 1120:http://www.irs.ustreas.gov) and pays taxes on its income
• Stockholders are also taxed on profits they receive in the form of dividends
• Must withhold income tax and FICA from employee wages
• Must pay its share of FICA and pay FUTA

Double Taxation:

• Both corporation income and stockholder dividends are taxed
• Dividends can not be deducted and thus the corporation’s income is, in effect, taxed twice

Avoiding Double Taxation:

• Small corporations can distribute the corporation’s earnings in the form of salaries, fringe benefits and rent (all of which are deductible)
• Elect to be taxed as an S corporation

S Corporation:

• Meet tests on IRS Form 2553 and file
• S Corporation does not pay income taxes directly
• Income or loss is passed directly to owners (shareholders) who pay personal income tax on it