Quick summary

This article explains the practical, legal, and tax differences that determine whether a business files Form 1120-S or Form 1120. It covers S-election timing, eligibility rules, tax consequences, typical mistakes, and steps to change filing status. The guidance references IRS forms and common compliance issues; consult a CPA for tailored advice.

How the two returns differ in plain terms

  • Form 1120 (U.S. Corporation Income Tax Return): Used by C corporations. The corporation pays tax on its taxable income at the corporate tax rate (currently a flat 21% as set by the Tax Cuts and Jobs Act). Shareholders pay tax again on dividends — the classic “double taxation” model. (IRS: About Form 1120: https://www.irs.gov/forms-pubs/about-form-1120)

  • Form 1120-S (U.S. Income Tax Return for an S Corporation): Used by S corporations that have made a valid S-election. Most income, losses, deductions, and credits pass through to shareholders and are reported on Schedule K-1 (Form 1120-S). The S corporation generally does not pay federal income tax, though certain built-in gains or passive income exceptions can create entity-level tax. (IRS: About Form 1120-S: https://www.irs.gov/forms-pubs/about-form-1120-s)

Both returns have the same universal filing deadline rule: generally the 15th day of the third month after the tax year ends (March 15 for calendar-year corporations), unless an extension is obtained. (See form instructions for current deadlines.)

Who qualifies to file Form 1120-S?

An eligible corporation can elect S status by filing Form 2553 (Election by a Small Business Corporation). Key qualification rules:

  • Shareholder limits: 100 shareholders maximum (some family-member aggregation rules apply).
  • Eligible shareholders: generally U.S. citizens or resident individuals, certain trusts, and estates; most nonresident aliens are disqualified.
  • Single class of stock: the corporation can only have one class of stock (differences in voting rights are allowed if they don’t affect distribution rights).
  • Domestic corporation: must be a U.S. domestic entity.

For details, see IRS guidance on Form 2553 (about Form 2553): https://www.irs.gov/forms-pubs/about-form-2553

In practice: I regularly advise startups and small owner-operated businesses to consider whether S status fits their owners’ goals. For closely held businesses focused on distributing profits to owners rather than accumulating taxable retained earnings, S status often reduces the overall tax burden.

Common reasons a business files Form 1120 instead of Form 1120-S

  • Plans to retain earnings in the company or raise capital from investors who prefer corporate structure (e.g., venture capital, institutional investors) — C status is often preferable.
  • Presence of non-US-resident shareholders or certain ineligible shareholders.
  • A decision to take advantage of the flat corporate tax rate and favorable treatment for retained profits or certain deductions.
  • Wanting flexibility in multiple classes of stock to attract different investor rights.

See our deeper comparison for entity selection considerations: S Corporation vs. C Corporation: Tax Differences and Choosing the Right Structure (internal): https://finhelp.io/glossary/s-corporation-vs-c-corporation-tax-differences-and-choosing-the-right-structure/

Timing and mechanics: How and when to elect S status

  • To be an S corporation for a given tax year, the corporation normally must file Form 2553 by the 15th day of the third month of that tax year (e.g., March 15 for calendar-year filers) or during the prior tax year.
  • Late elections may be possible if the corporation meets IRS relief procedures and shows reasonable cause. The Form 2553 instructions explain relief for late elections.

Internal link: Form 2553 — Election by a Small Business Corporation: https://finhelp.io/glossary/form-2553-election-by-a-small-business-corporation-s-corp-election/

In my practice I’ve seen owners miss the March 15 deadline and successfully request late election relief, but relief requires timely corrective action and documentation — so don’t wait.

Tax consequences and practical considerations

  • Flow-through taxation (1120-S): Shareholders report their share of income or loss on personal returns (Schedule K-1). Losses are limited by the shareholder’s basis, at-risk amounts, and passive activity rules. Shareholders must also pay self-employment tax only on reasonable compensation they receive as employees — not on all pass-through income, though the IRS scrutinizes “reasonable compensation” closely.

  • Entity-level taxation (1120): The corporation pays tax at the corporate rate on its taxable income. Distributions to shareholders (dividends) are taxable to shareholders, potentially producing double taxation.

  • Payroll and compensation: S shareholders who work in the business must generally be paid reasonable compensation subject to payroll taxes. Underpaying salary to reduce employment taxes is a frequent audit trigger.

  • Special taxes and traps: Converting from C to S can trigger the built-in gains tax on appreciated assets sold within a recognition period after conversion. Also, excess passive investment income can cause an S corporation to lose its status if it has accumulated earnings and profits from prior C years. These are complex topics; review IRS guidance or consult a tax advisor.

Examples (real-world style)

  • Example 1 — Small owner-operator: Two owners run a profitable consulting firm that distributes nearly all profits. Electing S status (filing Form 2553 timely and then filing Form 1120-S annually) reduced combined owner-level tax compared with corporate-level tax plus dividends. The trade-off: they must take reasonable salaries and monitor basis and loss limitations.

  • Example 2 — High-growth startup seeking VC funding: The company kept C corporation status (Form 1120) because investors required preferred stock and a C structure to facilitate investments and stock options. The owners accepted entity-level tax in exchange for growth capital.

These are representative—your facts may differ.

Common mistakes to avoid

  • Assuming every corporation should be an S: Eligibility and growth plans matter.
  • Missing the Form 2553 deadline or failing to document the timely election.
  • Forgetting shareholder basis, at-risk, and passive loss limitations when claiming pass-through losses.
  • Paying shareholders unreasonably low salaries to avoid payroll taxes.

Filing checklist

  • Determine tax year and filing deadline (Form 1120 / 1120-S due on 15th day of third month; extensions available).
  • If electing S status, prepare and file Form 2553 timely (or document late-election relief).
  • Prepare payroll, issue W-2s for shareholder-employees, and withhold payroll taxes.
  • Prepare Schedule K-1 (Form 1120-S) for each shareholder if S status applies (K-1 is attached to Form 1120-S; each shareholder needs it to file their personal return).
  • Keep corporate minutes and records supporting distributions, salaries, and shareholder basis calculations.

IRS references: About Form 1120-S (https://www.irs.gov/forms-pubs/about-form-1120-s) and About Form 1120 (https://www.irs.gov/forms-pubs/about-form-1120).

Also review related FinHelp entries: “Form 1120: U.S. Corporation Income Tax Return” (internal) — https://finhelp.io/glossary/form-1120-u-s-corporation-income-tax-return/ and our entity selection guide: https://finhelp.io/glossary/entity-selection-roadmap-when-to-use-an-llc-corporation-or-trust/

Final takeaways and next steps

Choosing between Form 1120-S and Form 1120 is a strategic decision, not a paperwork afterthought. Consider:

  • Ownership structure and investor plans.
  • Whether you’ll retain earnings or distribute profits.
  • The administrative rules (reasonable compensation, basis tracking, and eligibility limits).

If you’re evaluating a change in status, gather profit projections, ownership lists, and a timeline for any planned capital raises. In my practice, a short modeling exercise comparing owner-level tax under S status versus corporate plus dividend tax under C status quickly clarifies which path makes sense.

Professional disclaimer: This article is educational and does not replace personalized tax or legal advice. Tax laws and IRS procedures can change; verify current rules and consult a qualified CPA or tax attorney for decisions about filing Form 1120-S vs Form 1120.

References

Internal FinHelp links used in this article:

If you want, I can prepare a short comparison worksheet (owner-level tax estimate vs corporate tax + dividend) to illustrate the numbers for your specific facts.