What is form 1120-s preparation?
The S-corp return, shareholder K-1s and the reasonable-compensation file that supports it.
An S-corp files Form 1120-S every year it holds the election, whether or not it made money — the form itself pays no federal tax. What it reports is who owns the company and how much of the year's income or loss belongs to each of them, transmitted to each shareholder on a Schedule K-1 that then feeds their personal Form 1040. The appeal of the structure is that pass-through income isn't hit with the corporate 21% rate a C-corp pays before its shareholders are taxed again on dividends. The cost of that appeal is a set of eligibility rules and a compensation requirement that, if missed, can undo the whole election.
Every S-corp with a shareholder who also works in the business has to run payroll for that shareholder before it can call anything else a distribution. The IRS's rule is that a shareholder-employee must be paid "reasonable compensation" — a real W-2 salary reflecting what the work is worth — before any profit is paid out as a distribution. Distributions carry no payroll tax; W-2 wages do. An owner who takes $10,000 in salary and $150,000 in distributions from a business where they do all the work has an obvious gap between what the job pays and what the shareholder actually earned, and the IRS has litigated this exact fact pattern for decades. There's no statutory dollar figure for "reasonable" — it's a facts-and-circumstances test built from comparable-role pay data, hours worked, and what the business would have paid a non-owner to do the same job.
Who does what
Prepared with partner CPA firms who review, sign and file.
Who does what
| Your CapEasy team | Form 1120-S preparation, the reconciliations and reporting behind it, and the questions list that keeps it honest. |
| Your CPA or enrolled agent | Everything that carries a licence in United States — rendered exactly as written: issue compilation, review or audit reports — those are restricted to licensed cpa firms. |
| You | One conversation with one named person, and the decisions that are genuinely yours. |
Form 1120-S preparation in United States
Reasonable compensation isn’t optional once a shareholder does the work
A shareholder who performs more than minor services for an S-corp is legally an employee of it first and a shareholder second, for payroll-tax purposes. The IRS's own guidance is unambiguous that compensation has to be paid before distributions and has to reflect what the services were actually worth — not a token salary designed to shift income into lower-taxed distributions. We build the comparable-role pay documentation, the hours-worked record, and the payroll history that supports the salary figure the partner CPA firm signs off on; setting the actual number is the shareholder's decision on the CPA firm's advice, not ours.
A nonresident alien shareholder ends the S-election, full stop
Under IRC 1361, an S-corp’s shareholders are limited to individuals, certain trusts and estates — never a partnership, a corporation, or a nonresident alien individual. A single NRA shareholder, even holding one share for one day, terminates the election as of that date; the corporation reverts to being taxed as a C-corp unless a new election is properly re-made later, and re-election generally has its own waiting period. We flag any change in ownership against this bar before it’s treated as routine, and the eligibility determination on any borderline case — dual-status individuals, trusts with foreign beneficiaries — is the partner CPA firm’s call.
One class of stock means distributions track ownership percentage, not convenience
S-corp eligibility also requires a single class of stock — every share carries identical rights to distributions and liquidation proceeds. Distributions that don’t track ownership percentage cleanly (a disguised second class of stock through, say, a shareholder loan that behaves like preferred equity) can itself jeopardize the election. We reconcile distributions against the cap table for the year the return covers and flag anything that doesn’t track ownership evenly, for the partner CPA firm to assess.
The S-election itself has its own filing window, separate from the annual return
Form 2553 has to be filed within roughly two months and fifteen days of the start of the tax year the election is meant to cover (or at any point during the prior year). Miss that window and the corporation defaults to C-corp treatment for the year, with the election — if still wanted — only taking effect the following year. This is a one-time filing question we flag for any new S-corp client, distinct from the 1120-S that gets filed every year afterward.
What your CPA or enrolled agent receives from us
- A closed year-end trial balance and general ledger reconciled to the bank and any merchant-processor statements for the period the return covers.
- A completed shareholder cap table for the year, showing ownership percentage and any changes in holdings, dated.
- A confirmed S-election status check — Form 2553 acceptance on file, or a flag if it was never confirmed with the IRS.
- A reasonable-compensation file per shareholder-employee: comparable-role pay data, hours worked, payroll history for the year, and the resulting W-2 total, reconciled against total distributions taken.
- A distributions ledger for the year, broken out per shareholder and checked against ownership percentage for consistency with the one-class-of-stock rule.
- A draft Schedule K-1 per shareholder, with income, deductions and credits allocated per their ownership share for the CPA firm to review before issue.
