When it comes to filing taxes for your business, understanding which form to use is essential. Two of the most commonly used forms for corporations are Form 1120 and Form 1120S. While both forms are used to report income, deductions, and other financial information to the IRS, they are meant for different types of corporations. So, how do you know which form applies to your business?
In this detailed blog, we’ll compare Form 1120 and Form 1120S, explain the key differences between the two, and help you determine which form your business should file. Additionally, we will explain how working with experienced tax consultants like PEAK Business Consultancy Services (PEAK BCS) can ensure that your tax filings are accurate and compliant with IRS regulations. Learn more about our services here.
What is Form 1120?
Form 1120 is the U.S. corporate income tax return that C Corporations file to report their income, gains, losses, and deductions to the IRS. A C Corporation is a type of business entity that is taxed separately from its owners. Unlike S Corporations, C Corporations are subject to corporate income tax on their profits. The business itself files the tax return and is responsible for paying the taxes, though the profits can eventually be distributed to shareholders in the form of dividends, which are also subject to tax.
Form 1120 allows businesses to claim various deductions, including operating expenses, employee salaries, and other business-related costs. These deductions help reduce the overall taxable income of the corporation. C Corporations are generally taxed at a flat corporate tax rate, which as of 2025 is 21%, and they may also face double taxation when profits are distributed as dividends to shareholders.
When to Use Form 1120
If your business is a C Corporation (meaning it has not elected to be treated as an S Corporation), you will use Form 1120 to file your corporate income tax return. C Corporations are separate legal entities from their owners, and they are taxed independently. If your business structure includes shareholders, limited liability, and you are subject to corporate tax rates, then Form 1120 applies to your business.
Key Features of Form 1120
- Separate taxation: The business is taxed separately from its owners, and profits are taxed at the corporate level.
- Potential for double taxation: Dividends distributed to shareholders are taxed again at the individual level.
- Wide range of deductions: C Corporations can deduct business expenses such as wages, benefits, and operating costs to lower taxable income.
How PEAK BCS Can Help: PEAK BCS can assist C Corporations with filing Form 1120, ensuring that all deductions and credits are claimed properly. We can also help optimize tax strategies and ensure compliance with corporate tax laws to reduce your overall tax liability.
What is Form 1120S?
Form 1120S is used by S Corporations to report income, deductions, and other financial information to the IRS. Unlike C Corporations, S Corporations are pass-through entities, meaning that they do not pay taxes at the corporate level. Instead, the profits and losses pass through to the shareholders, who report them on their individual tax returns. This avoids the issue of double taxation that C Corporations face when dividends are distributed to shareholders.
S Corporations elect to be taxed under Subchapter S of the Internal Revenue Code, which allows them to retain many of the benefits of a corporation while being taxed like a partnership. Shareholders of an S Corporation report their share of the income and losses on their personal tax returns, and they pay taxes at individual tax rates. However, S Corporations must adhere to strict eligibility requirements to elect S Corporation status, including limitations on the number and type of shareholders.
When to Use Form 1120S
If your business is an S Corporation, you will file Form 1120S. To qualify as an S Corporation, your business must meet specific criteria, including:
- Be a domestic corporation
- Have no more than 100 shareholders
- Only have individuals, certain trusts, and estates as shareholders (no partnerships or corporations)
- Have only one class of stock
S Corporations can be an excellent option for small businesses that want to avoid double taxation but still enjoy the benefits of limited liability and corporate structure. If your business meets these requirements, Form 1120S is the correct form to use.
Key Features of Form 1120S
- Pass-through taxation: The business itself does not pay taxes; instead, income, deductions, and credits are passed through to the shareholders, who report them on their personal returns.
- No double taxation: Shareholders are only taxed once on the income from the S Corporation, as opposed to the double taxation that C Corporations face.
- Reasonable salary for shareholders: Shareholders who are also employees of the business must be paid a reasonable salary, which is subject to payroll taxes.
How PEAK BCS Can Help: PEAK BCS specializes in assisting S Corporations with Form 1120S filings. We ensure compliance with IRS rules, help with shareholder income allocations, and offer guidance on the appropriate salary to pay shareholders. Our team helps S Corporations maximize tax efficiency while remaining compliant with all regulations.
Key Differences Between Form 1120 and Form 1120S
1. Taxation Structure
Form 1120 is for C Corporations, which are subject to corporate income tax on their profits. C Corporations face the possibility of double taxation—once at the corporate level and again when dividends are distributed to shareholders. In contrast, Form 1120S is for S Corporations, which avoid double taxation because they are pass-through entities. The business itself does not pay taxes; instead, profits and losses are passed through to shareholders, who report them on their individual tax returns.
2. Eligibility Requirements
C Corporations file Form 1120 and can have unlimited shareholders, including other corporations, partnerships, and non-U.S. residents. S Corporations, however, must meet strict eligibility criteria, including having no more than 100 shareholders, who must all be U.S. citizens or residents, and only one class of stock.
3. Self-Employment Taxes
In a C Corporation, shareholders who work for the business are treated as employees and pay payroll taxes on their salary. However, in an S Corporation, shareholders who are also employees must receive a reasonable salary, and only that salary is subject to payroll taxes. Any income received as dividends is not subject to self-employment taxes, which can lead to tax savings for shareholders.
4. Corporate Formalities
C Corporations have more stringent formal requirements than S Corporations. They must hold regular meetings, maintain detailed records, and file annual reports with the state. While S Corporations also have some formalities, they are generally less burdensome than those of C Corporations.
Which One Is Better for Your Business?
The choice between Form 1120 and Form 1120S depends largely on your business structure, your goals for growth, and your tax preferences. Here are some factors to consider:
When to Choose Form 1120 (C Corporation)
If your business is looking to reinvest profits back into the company and does not need to distribute large amounts of income to shareholders, a C Corporation structure might be more beneficial. It’s also a better option for businesses that want to attract outside investors or raise capital through the sale of stock. Additionally, C Corporations may be better for businesses that want to retain earnings and not be taxed on distributions until they are paid out as dividends.
When to Choose Form 1120S (S Corporation)
If your business is smaller, and you want to avoid double taxation while still benefiting from limited liability, an S Corporation might be the better choice. S Corporations are ideal for businesses where shareholders are active in the day-to-day operations and want to avoid paying self-employment taxes on dividends. However, S Corporations come with restrictions on ownership and must meet specific IRS requirements.
How PEAK Business Consultancy Services Can Help
PEAK Business Consultancy Services specializes in helping small business owners choose the right business structure and navigate the tax implications of forming a C Corporation or S Corporation. Our team of experts will guide you through the process of choosing the most tax-efficient structure based on your business goals, and we’ll assist you with the preparation and filing of Form 1120 or Form 1120S.
Whether you’re starting a new business or restructuring an existing one, PEAK BCS offers the support you need to make informed decisions and optimize your tax strategy.
Conclusion
Choosing between Form 1120 (C Corporation) and Form 1120S (S Corporation) depends on several factors, including the size and growth trajectory of your business, your preferences for how profits are taxed, and the level of complexity you’re willing to accept in terms of corporate formalities. Both forms offer distinct advantages, and understanding their differences is key to optimizing your tax strategy and ensuring long-term business success.
PEAK Business Consultancy Services is here to help you navigate these complex decisions. Our team will work with you to determine which structure is best for your business and ensure that your tax filings are accurate and compliant with IRS regulations.
To schedule a consultation or learn more about how we can assist with your tax filings, visit www.peakbcs.com.
