Form 1120S is the form used for an S-corporation’s annual tax return.  As with a partnership, Schedules K and K-1 are used to show how the business’s different types of income and deductions are allocated among the owners.

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The big benefit of being an S-corp is that shareholders do not have to pay self-employment tax on their share of the business’s profits.

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The big catch is that before there can be any profits, each owner who also works as an employee must be paid a “reasonable” amount of compensation (salary). This salary will be subject to Social Security and Medicare taxes to be paid half by the employee and half by the corporation. As a result, the savings from paying no self-employment tax on the profits only kick in once the S-corp is earning enough and there are profits to be paid out after paying the mandatory “reasonable compensation.”