If you run a small business — whether it's a restaurant in the Bronx, a construction crew in Detroit or a trucking operation in Chicago — you've probably been told to 'become an S corp' to save on taxes. Maybe it was a friend. Or maybe it was a cousin who swears it cut their tax bill in half. However, few people stop to explain what this actually means or the potential risks and paperwork involved if you get it wrong.
This matters to many of us. According to the 2020–2024 American Community Survey, 228,504 U.S. residents reported Albanian ancestry, with sizeable communities in the New York–Newark–Jersey City metropolitan area, the Detroit metropolitan area, and the Chicago metropolitan area (dua.com, 2024). If you run a family business, the S corporation is one of the structures you may be weighing once revenue grows.
Here's the scale of it: For the 2023 tax year, the IRS Statistics of Income estimated 5,440,879 active Form 1120-S returns (IRS, 2023). That's millions of owners asking the same questions you might have: how do S corp taxes work, and is the structure worthwhile? Let's walk through it in plain language.
Key takeaways
- An S corporation generally does not pay federal income tax itself — profits pass through to the owners and are reported on a Schedule K-1, although the corporation can owe certain taxes in limited cases.
- For the 2025 tax year, a Social Security tax of 6.2% was applied to both employees and employers, up to a wage base of $176,100 (Social Security Administration, 2025).
- Courts have treated an owner-employee's distributions as wages when the salary paid was too low, as in the Eighth Circuit's 2012 Watson decision.
- For tax year 2025 returns, filing Form 1120-S late carried a penalty of $255 per shareholder per month, up to a maximum of 12 months (IRS, 2025).
Table of Contents
What 'pass-through' really means for your taxes
Start with the big idea. Unlike a regular corporation, an S corporation is not a separate taxpayer. While the business files its own return — Form 1120-S — it usually doesn't pay federal income tax on its profits. Instead, the profit 'passes through' to the owners. This is known as 'pass-through' taxation, and it's the whole point of this type of structure.
So, how does the money reach you? Each owner receives a Schedule K-1, which is a tax document reporting your share of the company's income, deductions, and credits. You then transfer these figures to your personal tax return. For example, if your S corp earned $120,000 in profit and you own the entire business, roughly $120,000 will appear on your 1040, even if the cash never left the business bank account.
That last part often comes as a surprise. You can owe tax on profits left in the business to buy equipment or cover slow periods. It's the profit that's taxed, not the withdrawal.
To give you an idea of the sums of money involved, for the 2023 tax year, the 5.4 million S corp returns reported a total net income minus deficit of approximately $983.6 billion, equating to around $180,788 per return (IRS, 2023). This is an average, not a guarantee — many S corps make a loss in a given year.
The salary rule that trips owners up
This is where you can find both the real tax savings and the real danger.
When you own an S corp and work in it, the IRS treats you as two things at once: an employee and an owner. As an employee, you generally need to be paid a reasonable salary through payroll. As an owner, you can also take shareholder distributions — money pulled out of the business profit that is not wages.
Why does the split matter? Payroll taxes. Wages are subject to Social Security and Medicare taxes. Distributions are not. This means that some owners are tempted to pay themselves a small salary and take the rest as distributions, in order to avoid paying those taxes.
The standard is usually called 'reasonable compensation', and the idea is broadly what the business would pay someone else to do your job. If you pay yourself too little, you're asking for trouble. In the 2012 case of David E. Watson, P.C. v. United States, the Eighth Circuit rejected the accountant's reported salary of $24,000 for the 2002 and 2003 tax years, instead accepting $91,044 as reasonable annual compensation (U.S. Court of Appeals for the Eighth Circuit, 2012). The owner ended up owing back payroll taxes on the difference.
This isn't an unusual target either. A 2021 report from the Treasury Inspector General for Tax Administration (TIGTA) identified 266,095 unexamined single-shareholder S corp returns, processed in 2016–2018, that reported profits above $100,000 and no officer compensation, and estimated about $3.3 billion in avoided FICA taxes (TIGTA, 2021). That is an older estimate, but it shows why a salary that is too low can draw scrutiny.
How payroll taxes actually add up
Let's take a look at the payroll aspect, because this is where an S Corp CPA earns their fee.
For the 2024 tax year, the Social Security tax rate was 6.2% for both employees and employers, up to a wage base of $168,600. For the 2025 tax year, this increased to $176,100 (Social Security Administration, 2025). As you are both the employee and the employer, your business effectively pays both halves. Above that wage base, Social Security tax is not payable.
Medicare is different in that there is no wage ceiling. For the 2024 and 2025 tax years, the Medicare tax was set at 1.45% for both the employee and the employer, with no wage base. An additional 0.9% Medicare tax was levied on the employee's earnings above $250,000 for those filing jointly, $125,000 for those filing separately, and $200,000 for all other filers (IRS, 2025).
The appeal of the distribution strategy is that wages carry Social Security and Medicare tax and distributions do not, so shifting money from salary to distributions can reduce payroll tax on paper. However, the salary still has to be reasonable, and any saving only holds if the IRS would not dispute it later. Whether this works for you depends on your numbers, so talk to a CPA before changing how you pay yourself.
Do you need an Albanian accountant who speaks Albanian? Heritage Web can put you in touch.
The deduction that many S corp owners can claim
There's a tax break on income, too. The Section 199A deduction enables many pass-through business owners to claim a portion of their qualified business income on their personal tax return.
It phases out at higher incomes and the rules become more complicated for certain service businesses. For the 2025 tax year, the wage/property and specified-service limitations phased in over taxable income of between $394,600 and $494,600 for joint filers, and between $197,300 and $247,300 for other filers (IRS, 2024). Below these ranges, the deduction is simpler to claim, but inside and above them, the process becomes more technical.
This deduction isn't going away. Public Law 119-21, signed July 4, 2025, made the §199A deduction permanent and, starting with tax year 2026, widened the phase-in ranges and added a $400 minimum deduction for qualifying taxpayers with at least $1,000 of active qualified business income (IRS, 2026). For context on how widely this is used — though not only by S corp owners — roughly 26.6 million returns claimed the deduction for tax year 2023, totaling about $214.6 billion (Congressional Research Service, 2023).
State rules, the election and correcting mistakes
Federal rules only tell half the story. States treat S corps differently: some recognize the federal election automatically, some require their own filing and some impose their own entity-level taxes. Check with your state's revenue department before assuming that the federal treatment carries over.
One area in which state rules can be helpful is the pass-through entity tax. The 2025 tax year Form CT-34-SH instructions for New York provide a shareholder credit tied to an electing S corporation's pass-through entity tax (New York State Department of Taxation and Finance, 2025). These regimes arose as a workaround for the federal cap on the individual state and local tax deduction. For the 2025 tax year, that cap was $40,000 ($20,000 for married couples filing separately), with reductions above certain income thresholds (New York State Department of Taxation and Finance, 2025). However, the details vary by state, so it is advisable to consult someone licensed in your state.
To become an S corp in the first place, you file an S corporation election with the IRS. If you miss the deadline, relief may be available. Revenue Procedure 2013-30 generally permits late S-election relief within 3 years and 75 days of the intended effective date, if late filing was the only defect, there was reasonable cause and you acted diligently (IRS, 2013). Revenue Procedure 2022-19, effective October 11, 2022, amplified that relief and, in its §3.06, permits corrective relief for certain non-identical governing provisions — provided there were no disproportionate distributions, required Forms 1120-S were timely filed, and corrections were made before the IRS discovered the problem (IRS, 2022). Translation: some mistakes are fixable if you catch them early, but the conditions are strict, so talk to a CPA before relying on any of this.
Why do paperwork deadlines bite so hard?
S Corp penalties are unusual in that they are applied per owner rather than per return. This can catch family businesses off guard.
If Form 1120-S is filed late or incompletely, a penalty of $245 per shareholder per month may be incurred for up to 12 months for tax year 2024 returns, rising to $255 for tax year 2025 returns (IRS, 2025). A separate penalty for failing to provide a correct Schedule K-1 could be $330 per K-1 for 2024 returns and $340 for 2025 returns (IRS, 2025). If three owners are a few months late, the penalty could amount to thousands of dollars. Reasonable-cause relief is available, but you must request it.
Now, is the IRS actually looking? Audit coverage has been low — in the fiscal year 2024 Data Book, examination coverage for tax year 2022 returns was less than 0.05% for S corporations (IRS, 2024). That is a snapshot, not a forecast. The IRS's pass-through field operations unit formally began work on October 22, 2024, with a scope covering partnerships, S corporations and trusts (IRS, 2024). Low odds today don't guarantee low odds tomorrow.
Why language and culture matter here
None of this is easy to handle in a second language. A tabulation of 2024 ACS microdata estimated 184,704 Albanian speakers aged five or over. Of these, 41.3% reported speaking English less than 'very well' (dua.com, 2024). When terms are this technical — 'reasonable compensation', 'basis limitations', 'pass-through entity tax' — a small misunderstanding can result in a penalty for each owner.
That's why working with someone who can explain the rules in Albanian can be valuable. It can help you understand deadlines and penalties — such as the $255 per shareholder per month late-filing penalty for tax year 2025 returns — before they catch you off guard. An accountant who understands the tax code and how family businesses in our community operate can help you keep your records and filings in order. The way an S corp is taxed rewards those who plan ahead and penalizes those who guess.
Where to go from here?
If you're considering setting up an S corporation, or if you already have one and you're not sure whether your salary and distributions are set up correctly, don't just guess. A licensed professional can examine your specific circumstances, including your state's rules, your actual numbers and your family situation, to provide you with clear guidance.
Get in touch with an Albanian accountant who speaks your language and understands your culture. Submit your details via Heritage Web's secure referral form. Having the right S Corp CPA can mean the difference between making real savings and receiving an unwanted letter.
This article is general information, not tax advice. Tax rules change each year; speak with a CPA or enrolled agent about your situation.
Sources
- Social Security Administration — Social Security Administration, 2025
- Statistics of Income
- Form 1120-S
- Schedule K-1
- Congressional Research Service
- Revenue Procedure 2022-19
- Form CT-34-SH
- Public Law 119-21