Key takeaways
- The 2026 Form 1120-S is due March 15, 2027, and the 2026 Form 1120 is due April 15, 2027, for calendar-year entities.
- A C corporation's profit is taxed at 21%, and the owner pays tax again on dividends paid out of that profit.
- An S corporation owner who works in the business needs a documented salary before the first distribution.
- For an S election effective in 2027, Form 2553 must be filed by March 15, 2027, and the 2026 deadline has already passed.
Two returns and two due dates
Form 1120 is the income tax return for a C corporation. A calendar-year C corporation files it by April 15, so the 2026 return is due April 15, 2027. Form 1120-S is the S corporation return, due March 15 for a calendar-year corporation. The 2025 Form 1120-S was due March 16, 2026, because March 15, 2026 fell on a Sunday. Under the same rule, the 2026 Form 1120-S is due March 15, 2027.
Form 7004 gives an automatic extension of generally 6 months for both returns. It extends the time to file, not the time to pay. A calendar-year 2026 Form 1120-S on extension runs to September 15, 2027, and a Form 1120 runs to October 15, 2027. Do not tell a client that the extension covers tax owed.
The S corporation return carries more people. Each shareholder gets a Schedule K-1, due on or before the day the Form 1120-S is required to be filed. Under the 2025 instructions, a late Form 1120-S with no tax due is penalized at $255 for each month or part of a month, up to 12 months, multiplied by the number of shareholders. The 2026 amount may differ.
What the entity and the owner each pay
A C corporation pays federal income tax at 21% on its taxable income, computed on Form 1120 Schedule J under the 2025 instructions. An S corporation generally pays no federal income tax at the entity level. Its income is reported on each owner's Schedule K-1 and taxed on the owner's personal return.
A C corporation's profit is taxed a second time when it is paid out. For 2025 taxable years, qualified dividends are taxed at 0%, 15% or 20%, and the 15% rate covers most taxpayers. The 3.8% net investment income tax applies to the lesser of net investment income (including dividends) or the amount by which modified AGI exceeds $200,000 for single filers or $250,000 for married filing jointly.
Example: a C corporation has $100,000 of taxable income and pays $21,000 of federal income tax. It distributes the remaining $79,000 to one owner in the 15% bracket, which is $11,850 of tax. The combined federal tax is $32,850, or 32.85% of the $100,000. If the owner is above the $200,000 threshold, add 3.8% of $79,000, or $3,002, for a total of $35,852. The same $100,000 through an S corporation is taxed once, at the owner's ordinary rates, with no entity tax.
Decision rule: if the owners will take most of the profit out each year, the S corporation usually costs less tax because the second layer is avoided. If the business will keep most of its profit to fund growth, the 21% rate on retained earnings can be the cheaper path. Document the business reason for holding the cash, because the accumulated earnings tax can apply to cash kept beyond business needs.
Reasonable compensation for S corporation owners
The IRS says S corporations must pay reasonable compensation to a shareholder-employee for services, and that this pay comes before any distribution that is not wages. The IRS also says payments for an owner's personal services should be classified as wages subject to employment taxes. A distribution that stands in for a salary can be recharacterized as wages.
Decision rule: if the owner works full time in the business, set a salary before the first distribution and record the basis in a memo dated before the first payroll.
The memo should list the owner's duties, the hours the owner works each week, the market pay for that role in the owner's area and the revenue the owner's work produces. Ask the client: “Please send your job description, your average weekly hours in the business and any salary data you used to set your pay for 2026.” The memo goes in the owner's file.
Example: the business earns $100,000 before owner pay, and the documented salary for the owner's role is $60,000. The $60,000 runs through payroll as a W-2 wage with employment taxes withheld and deposited. The remaining $40,000 is a distribution of profit, not wages.
For a shareholder who owns more than 2% of the stock, the premiums the S corporation pays for the owner's health insurance are reported in box 14 of that owner's Form W-2, per the 2025 instructions. Set that up in payroll so the W-2 matches the Form 1120-S.
Form 2553: the S election and its deadline
Form 2553 is the election under section 1362(a) that makes an eligible entity an S corporation. It must be filed no more than 2 months and 15 days after the beginning of the tax year it is meant to take effect. Filing during the prior tax year also works. For a calendar-year entity that wants S status for 2027, the filing deadline is March 15, 2027, and an earlier filing in late 2026 is allowed.
Each shareholder consents by signing and dating the form, in column K or on a separate statement. For a filing made on or after the effective date, every shareholder or former shareholder who owned stock at any time during the period must consent.
Rev. Proc. 2013-30 can provide relief for a late election when the failure to file on time was due to reasonable cause. The corporation must file within 3 years and 75 days of the date entered on line E, and write FILED PURSUANT TO REV. PROC. 2013-30 across the top. Relief is not automatic, so document the reason before filing.
Decision rule: if the entity wants S status for 2026 and the deadline has passed, get the facts behind the miss before anyone files for relief. If there is no reasonable cause, the election starts with the next tax year. Do not start payroll or prepare a Form 1120-S on the assumption the election is valid until you have the filed copy.
Ask the client: “Please send us the Form 2553 you signed, the proof of mailing or fax confirmation and the name of every shareholder who signed it. If you never filed it, tell us the date you decided on S status.” The reply goes in the entity file.
Vendor 1099 effects of the entity type
A payment to a corporation, including an LLC treated as a C or S corporation, is generally excluded from Form 1099-NEC. The exception is a payment for legal services. Check the vendor's W-9 for its tax classification before excluding the vendor, and keep the W-9 in the vendor file.
For payments made in 2026, the Form 1099-NEC threshold is $2,000 per payee, up from $600 for payments made in 2025 and earlier. The 2026 Forms 1099-NEC are due February 1, 2027, because January 31, 2027 falls on a Sunday.
Failure modes and fixes
Wrong return type. A firm prepares a Form 1120 for an entity whose owners believe it elected S status. Fix: pull the filed Form 2553 and any IRS notice before the return is prepared, and compare the prior-year return type to the election on file.
Distributions with no salary. An owner who works full time takes all profit as distributions and draws no wages. Fix: set payroll before the next distribution, and correct the wage reporting with the payroll provider if payments have already gone out.
Late K-1s. Fix: if the Form 1120-S will be late, file Form 7004 by the regular due date and give each owner the expected K-1 date in writing.
Ignoring the second tax layer. A firm models only the 21% entity tax. Fix: add the owner's dividend tax on the cash the owner expects to take out before recommending a C corporation.