S Corp vs C Corp Filing: The Filing Decision That Determines Your 2025 Tax Bill
Most business owners are told any corporate structure avoids self-employment tax. The truth? The choice between S Corp vs C Corp filing in California can change your tax bill by $20,000 every year—and one wrong move gets you double-taxed, flagged for audit, or forced to pay taxes you’ll never recover. If you’re a W-2 earner, 1099 contractor, LLC owner, or real estate investor trying to dial in your entity structure for 2025, this plain-English breakdown exposes the real differences advisors gloss over.
Quick Answer: The tax filing method for S Corps and C Corps is fundamentally different—S Corps pass all profits to owners’ personal tax returns and avoid double tax, but have strict rules; C Corps pay corporate tax and can double-tax distributions, but offer more fringe benefits. Each has its own IRS forms, CA compliance, and hidden traps for the unwary.
This information is current as of 10/3/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.
Understanding S Corp vs C Corp Filing: Why It Matters in 2025
Ask most entrepreneurs which is better—S Corp or C Corp—and you’ll get generic advice: “S Corps save taxes.” Here’s where that narrative falls apart in California:
- S Corps: Income is taxed once at the shareholder level. Owners must pay themselves “reasonable salary” (W-2) plus can take distributions, which aren’t subject to Social Security and Medicare tax again. Filing is done on IRS Form 1120S and reported to the Franchise Tax Board with Form 100S.
- C Corps: File IRS Form 1120, pay a flat 21% federal tax plus 8.84% California corporate tax. Profits distributed as dividends are taxed again on the owner’s return. But C Corps can deduct a wider array of benefits and are preferred for startups seeking outside investors.
The catch: If you file the wrong form or miss an S election window, you could get double-taxed or lose limited liability protection altogether. The IRS scrutinizes these filings closely (especially in state audits).
Major Filing Differences: Forms, Taxes, and Traps
Let’s put this in dollar terms using two scenarios—a six-figure consultant and a real estate investor.
For W-2 Employees and 1099 Contractors
A 1099 consultant earning $220,000 who files as an S Corp pays herself $130,000 via W-2 salary and takes a $90,000 distribution. Her 15.3% self-employment tax applies only to the salary, saving around $13,770 in Social Security and Medicare tax, compared to an LLC. Her S Corp files 1120S, not Schedule C. If she files as a C Corp instead, she pays full corporate tax, then another 23.8% on dividends, plus loses some Qualified Business Income (QBI) deduction options.
For Real Estate Investors
A property syndicator with $350,000 in annual net income splits this through a C Corp, holding cash inside the company for reinvestment. The company pays federal and state taxes first ($101,340 combined), leaving $248,660 for future projects. If that same income flows through an S Corp, the owner pays state and federal tax at her marginal rate, possibly higher—but can often shift some income to distributions and reduce self-employment taxes. The filing method determines both the timing and the level of tax. For more complex real estate strategies, check our real estate tax prep services.
S Corp Filing Requirements That Trip Up Most Owners
California S Corps must:
- Timely file Form 2553 to elect S status—miss it, and you’re taxed as a C Corp by default
- Compensate working owners with reasonable wages (the IRS expects W-2s); lack of payroll gets returns flagged
- File Franchise Tax Board Form 100S and pay the annual $800 minimum franchise tax (even if no profit)
- Issue K-1s to all shareholders, who report S Corp profits/losses on their personal returns
- Disclose all entity-level income, salary, and distributions
Red Flag Alert: Too many S Corps skip payroll to “save taxes.” This gets picked up on audit—the IRS hit 14,800 S Corps in California in 2024 with payroll-related penalties. See IRS S Corp instructions for more.
KDA Case Study: LLC Consultant’s Filing Mistake Fixed (1099 to S Corp)
An independent marketing consultant, Sarah, ran a successful LLC as a sole proprietor, pulling in $185,000 per year in California. Her bookkeeper filed everything on Schedule C—she paid an extra $28,305 in self-employment taxes and faced a $2,700 FTB late fee when she missed the S election timeline. KDA restructured her operations, filed Form 2553 backdated under IRS relief rules, set up clean payroll ($100,000 salary, $85,000 distribution), managed filings on 1120S and CA 100S. End result: $14,627 first-year tax savings, $2,500 fee, 5.8x ROI. The bulk of her audit risk disappeared after the entity switch.
Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.
The C Corp Filing Playbook: When and Why It Works
Filing as a C Corp makes sense in three main situations:
- Raising outside capital (venture funding doesn’t flow to S Corps)
- Planning to roll profits forward for major reinvestment—C Corps can build retained earnings
- Maximizing fringe benefits (health insurance, HRA, etc.—fully deductible to the business and not included in shareholder income in many cases, unlike S Corps)
But: Once a C Corp declares dividends, those payouts show up again on your personal return, triggering a second layer of tax. Plus all C Corps pay both the federal and California corporate tax (over 29% in 2025 for CA-based entities).
S Corp tax strategies in California explain more about this timing game and how to avoid the “trapped cash” problem.
Pro Tip: Want to access profits from a C Corp without double-taxing? Set up a defined benefit plan or legitimate management fees before issuing dividends. See IRS Topic No. 403 for details.
Common Filing Mistakes That Trigger Audits or Double Taxation
Here’s what trips up business owners every year:
- Missing the S Corp election deadline—defaulting to C Corp status and getting double-taxed
- Commingling funds—blurring lines between personal and corporate expenditures
- No W-2 payroll in an S Corp—IRS challenges distributions as disguised wages
- Distributing profits in a C Corp without withholding appropriate taxes
- Failing to file correct forms with California FTB—leading to “Suspended” entity status and automatic penalties
Red Flag Alert: The FTB automatically penalizes late S Corp returns by $18 per shareholder per month (California FTB Corporation rules). The IRS will not accept a late S Corp unless you meet strict relief criteria (see Form 2553 late election instructions).
Which Filing Should You Choose?
If your goal is to pull out as much after-tax money as possible—in California, under $400,000/year—S Corp filing consistently produces 20–35% lower tax bills than a straight C Corp, once you include state rates and self-employment savings. If you want to build cash, sell stock, or attract VC (and you’re okay leaving some profit inside the company), C Corp filing is safer. There is no one-size-fits-all—your business type, growth strategy, and exit plan matter.
Remember: S Corps can only have 100 shareholders (all U.S. persons), can only issue one class of stock, and have strict compliance rules. C Corps allow for global investors, preferred shares, and unlimited growth. Both S Corps and C Corps require careful year-end planning to avoid penalties, IRS red flags, or money left on the table.
Follow-Up FAQs on S Corp vs C Corp Filing
What happens if I miss my S Corp election?
The IRS will classify you as a C Corp (default). Earnings are taxed at the corporate rate, and distributions as dividends. Late S election relief is possible but complex—fix it ASAP.
Can you switch from S Corp to C Corp or vice versa?
Yes, but the IRS has tight timelines and approval requirements. Converting S to C is easier, but going from C to S (or LLC to S Corp) often triggers built-in gains tax if not handled by a pro.
Are S Corp filings riskier in California?
More audits happen here due to CA’s high income threshold, frequent entity changes, and aggressive FTB compliance rules. Always work with a specialist familiar with both IRS and California rules.
What the IRS Won’t Tell You About S Corp vs. C Corp Filings
Both S Corp and C Corp filings create landmines the IRS rarely warns about. S Corps get scrutinized for missing payroll; C Corps for “accumulated earnings” penalties (IRS thinks you’re stashing too much profit). Both entities demand quarterly estimated payments, CA franchise tax minimums, and proactive documentation. The “set it and forget it” mindset causes more penalties, audits, and sleepless nights than any other business mistake.
Pro Tip: S Corp owners—never distribute profits to owners who don’t receive a W-2; C Corp owners—document the business purpose of all retained earnings above $250,000.
For a comprehensive guide on S Corp tax planning and compliance, don’t miss our Complete Guide to S Corp Tax Strategy in California.
Will Filing as an S Corp or C Corp Get Me Audited?
Not if your paperwork matches reality. Most audits happen because of missing forms, skipped payroll, or unexplained swings in profit. Document the “why” behind every filing decision, use clean software, and get professional support for first-year filings or late S elections.
The IRS isn’t hiding these write-offs—you just weren’t taught how to find them.
Book Your Filing Review Strategy Session
If you aren’t sure whether your S Corp or C Corp filing is saving or costing you thousands, don’t leave it to chance. Book a customized review with our KDA entity tax team for a no-nonsense, dollar-specific action plan. Click here to book your session now.
