S corporation
An S corporation is a corporation that elects to pass its income, losses and credits through to its shareholders, who pay the tax. It files Form 1120-S and gives each shareholder a Schedule K-1.
It may have no more than 100 shareholders, only one class of stock, and generally only US individuals, estates and certain trusts as owners. Shareholder-employees must be paid reasonable compensation before taking distributions.
Example. Jon owns 100% of an S corporation that earns $150,000. He takes a $70,000 salary, and the remaining $80,000 flows to his return without self-employment tax.
By Binod Raj Singh, CPA (licensed in Montana) · Updated for the 2026-2027 exam windows · Last updated 2026-11-05