Harper Tax CPA

1. Formation & Election

  • IRS (Federal):
    • File Form 2553 to elect S corporation status.
    • Must be a domestic corporation, have ≤100 shareholders, only allowable shareholders (individuals, certain trusts, estates), one class of stock, etc.
  • California:
    • Must file Form 100-S (S Corporation Franchise/Income Tax Return) each year.

2. Entity-Level Tax

  • IRS:
    • S corporations are “pass-through entities.” Income generally flows through to shareholders, and the corporation itself does not pay federal income tax (except for built-in gains tax, excess net passive income tax).
  • California:
    • S corporations pay a 1.5% franchise tax on net income (minimum $800, even if loss) in addition to shareholder taxation.
    • Newly incorporated/qualified corporations are exempt from the $800 minimum in their first taxable year.

3. Minimum Tax

  • IRS:
    • No minimum federal income tax for S corporations.
  • California:
    • $800 minimum franchise tax applies (except for first year).

4. Shareholder Taxation

  • IRS:
    • Shareholders report their share of income, losses, credits, etc. on Schedule K-1 (Form 1120-S) and then on their 1040.
    • Income is taxed at federal individual rates.
  • California:
    • Shareholders report their share of income on Schedule K-1 (100-S).
    • Nonresident shareholders must file a California return for California-sourced income.
    • S corporation shareholders in CA may also be subject to the California Pass-Through Entity Tax (PTET) election, which can allow a SALT deduction workaround.

5. Apportionment & Source Rules

  • IRS:
    • No apportionment between states; income is fully federal.
  • California:
    • Multistate S corporations must use California’s apportionment and allocation rules to determine California-source income.
    • Nonresidents pay CA tax only on their share of CA-sourced income.

6. Filing Requirements

  • IRS:
    • File Form 1120-S annually by March 15 (or extended date).
  • California:
    • File Form 100-S annually by March 15 (or extended).
    • Must also file Form 199 if exempt, or Form 3539 for estimated tax payments if needed.

7. Estimated Taxes

  • IRS:
    • S corporations generally don’t make estimated tax payments (unless subject to built-in gains or passive income tax). Shareholders make estimated payments individually.
  • California:
    • S corporations must make estimated franchise tax payments if they expect to owe >$500.
    • Shareholders also may need to make their own estimated tax payments on their California K-1 income.

8. Franchise Tax vs Income Tax Distinction

  • IRS:
    • No distinction — income passes through.
  • California:
    • The 1.5% is a franchise tax, not an income tax, and applies even if the S-corp has losses.

9. Miscellaneous

  • IRS:
    • No requirement for nonresident agreements.
    • Federal conformity applies across all states.
  • California:
    • Nonresident shareholders must sign Form FTB 3832 (Nonresident Shareholder’s Consent) to allow CA to tax them. Without this, the S-corp pays tax on their behalf.

 

Confused about the differences between federal and California S-Corp taxes? You’re not alone. Harper Tax CPA helps business owners navigate both systems with confidence. Schedule your tax strategy call and keep more of what you earn.

 

Get Started

Ready to make your S-Corporation more efficient?

📞 Schedule your free consultation today with Harper Tax CPA to learn how to save on taxes while staying fully compliant. Call: 509-596-0335

📧 Email — [email protected] (Click Here)
📝 Use the Internal Contact Form on our website to request a consultation. (Click Here)

Prefer to schedule directly?
You can easily book a time that fits your schedule using our Calendly calendar (Click Here).

Want to learn about our California S corporation services? (Click Here)

Want to learn about our City of LA S corporation services? (Click Here)