S Corp Taxation S Corps are pass-through entities, which means that shareholders are taxed on the corporate profits on their individual returns.  But unlike partnerhips (the only other form of pass-through entitty) the S corp profits are not subject to self employment tax (ie FICA tax) of 15.3%.  That can be a significant savings.  The catch is that the shareholder-employee (shareholder who works in the business as an employee) must receive reasonable compensation as wages.  That means they must be on the payroll for a wage that reasonably reflects their responsilities, their skill set, their part of the country etc.   So, a shareholder-employee must receive compensation in the form of wages which are subject to FICA tax, but can also receive a distribution of profits that is not subject to FICA. An important note about pass through entities:  The tax (on the individual's return) is based on the profit earned that year.  It is not uncommon that the profit earned was not distributed to the owner.  Sometimes the profit on the tax return is not actually cash sitting in the bank account, but inventory sitting on the shelves.  Or maybe the profit was used to pay down debt.  There are also other considerations, like distributions in excess of basis or suspended losses that affect the taxes.  It's a bit complicated so it's agood idea to have some professional help. To elect S status, you have until March 15th of that year for file Form 2553.  If it's a new business, you have 75 days to elect S status.  For new businesses, there are some revenue rulings that can be cited to get a late S election accepted, but it's far better to just file on time.