S Corp vs C Corp Taxation: The Key Differences
Choosing between an S corporation and a C corporation is more than a legal formality — it directly affects how your business income is taxed, how you pay yourself, and how much flexibility you have as the company grows. The wrong choice can lead to unnecessary taxes, compliance problems, or costly restructuring later.
Understanding how S corp vs. C corp taxation works is essential before — and after — you form a corporation.
How C Corporations Are Taxed
A C corporation is a separate tax-paying entity. This creates what is commonly referred to as double taxation:
The corporation pays federal and state tax on its profits
Shareholders pay tax again when profits are distributed as dividends
At the federal level, C corps are subject to a flat corporate tax rate. California also imposes a corporate tax, regardless of whether profits are distributed.
How S Corporations Are Taxed
An S corporation is generally a pass-through entity, meaning:
The corporation itself usually does not pay federal income tax
Profits and losses pass through to shareholders’ personal tax returns
Income is taxed once, at the individual level
However, California still imposes a minimum franchise tax and an entity-level tax on S corporations.
Paying Yourself: A Major Difference
One of the biggest distinctions involves compensation:
S corp owners must pay themselves a reasonable salary subject to payroll taxes, with remaining profits distributed as dividends not subject to self-employment tax
C corp owners are typically paid as employees, with dividends taxed separately
Mismanaging compensation is a common audit trigger — especially for S corps.
California-Specific Considerations
California adds complexity through:
Minimum franchise taxes for both entities
S corp entity-level tax based on net income
Different treatment of losses and credits
Strict compliance and filing requirements
Failing to plan for California’s rules can erase expected tax savings.
Common Mistakes Business Owners Make
Problems often arise when:
The entity choice is made without tax analysis
S corp salaries are set too low
Business growth outpaces the chosen structure
California taxes are overlooked
Owners fail to reassess as circumstances change
Entity choice is not “set and forget.”
How All California Accountancy Can Help
At All California Accountancy, we help business owners:
Compare S corp and C corp tax implications
Structure compensation correctly
Model tax outcomes before choosing an entity
Stay compliant with IRS and California rules
Reevaluate entity choice as businesses grow
The right structure today can prevent expensive corrections tomorrow.
Disclaimer
This article is for educational purposes only and does not constitute legal, tax, or accounting advice. Consult a qualified CPA regarding your specific situation.
IRS Circular 230 Disclosure: Any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties or promoting, marketing, or recommending any transaction or matter addressed.