Electing S corp status is a milestone for many freelancers. It usually means your business has grown enough that the tax savings are worth the extra structure. But your first tax season as an S corp looks very different from filing a Schedule C. Knowing what’s coming makes the transition much smoother.
New forms and deadlines compared to a Schedule C
As a sole proprietor or single-member LLC, filing was fairly simple. You reported business income and expenses on Schedule C, attached it to your Form 1040 and paid self-employment tax with Schedule SE. Everything was due on the same day in April.
As an S corp, your business files its own return, Form 1120-S. It’s due March 15 for calendar-year businesses, a month earlier than your personal return. The S corp itself usually doesn’t pay federal income tax. Instead, it issues you a Schedule K-1 showing your share of the profit, which you then report on your personal return.
Payroll adds another layer. Because you’re now an employee of your own company, you need to run payroll, withhold income and payroll taxes, and file quarterly payroll returns on Form 941. At the end of the year, your company issues you a W-2, and it must file that W-2 with the Social Security Administration by the end of January. Many states also require their own payroll filings and unemployment insurance registration. A reliable S corp payroll service can handle these filings automatically so nothing slips through the cracks.
Your bookkeeping needs to be tighter, too. Form 1120-S includes a balance sheet, so the business’s bank accounts, assets and liabilities need to reconcile at year-end.
Mistakes first-time S corp filers often make
The first year is when most S corp errors happen. Watch out for these common ones:
- Skipping payroll: Some owners take all their income as distributions and pay themselves no salary. The IRS requires a reasonable salary, and skipping it can lead to back taxes and penalties.
- Missing the March deadline: Treating March 15 like April 15 can trigger late-filing penalties for each shareholder, for each month the return is late.
- Mixing personal and business funds: Paying personal expenses from the business account makes your books harder to reconcile and can weaken your liability protection.
- Forgetting to reimburse expenses properly: Home office costs and personal phone use should be reimbursed through an accountable plan rather than deducted on your personal return.
- Filing the election late: Form 2553 generally must be filed within two months and 15 days of the start of the tax year you want it to apply to.
- Underpaying estimated taxes: Distributions don’t have tax withheld, so you may still need quarterly estimated payments.
Working with an accountant for self-employed professionals in your first year can help you set up payroll correctly, track distributions and catch mistakes before they turn into penalties.
Your first S corp tax season has more moving parts, but it gets easier once your systems are in place. With the right support for solopreneur accounting and taxes, the switch can pay off in real savings year after year.
