Understanding Tax Liability: S-Corps, C-Corps, and LLCs Explained 

As we move deeper into tax season with business returns just a month away, it’s the perfect time to clarify one of the most confusing aspects of running a business: how different entity types affect your tax obligations. Whether you’re filing a Form 1120, 1120-S, 1065, or Schedule C, understanding who pays what taxes can save you from costly mistakes and penalties.

The type of business entity you’ve chosen, along with any elections you’ve made, determines not only which forms you file but also how and when taxes are paid. Let’s break down each entity type so you can navigate tax season with confidence!

C Corporations

If you operate as a C corporation and are required to file Form 1120, you have the most straightforward (though not necessarily the simplest) tax situation. C corporations are unique because they’re the only business entity type that pays taxes directly at the corporate level.

Your C corporation will have federal tax liability, not the owners personally. Additionally, depending on your state, you’ll likely face state corporate income taxes as well. This is fundamentally different from pass-through entities, which we’ll discuss next.

S Corporations

S corporations represent a popular alternative to C corporation taxation. You might have an S corporation in one of three ways: a C corporation with an S corp election, a standalone S corporation, or an LLC that has elected S corporation tax treatment. In all cases, you’ll file Form 1120-S.

Here’s what makes S corporations different: at the federal level, your business pays zero taxes. Instead, all business income passes through to the owners via Schedule K-1 forms. The owners then report this income on their personal Form 1040 tax returns and pay income tax based on their individual tax brackets.

State taxation varies significantly. Some states, like Texas, may impose income-based taxes on business entities. California, Oregon, New York, and New Jersey each have their own state-level business taxes for S corporations. It’s important to understand your specific state’s requirements.

A Critical Point About Payment Responsibility

This is where many S corporation owners get confused, and it’s important to get it right. The tax liability belongs to the owners personally, not the business. If your business pays these taxes on your behalf, that payment is considered an owner’s draw, not a business expense.

I see this mistake constantly: business owners record tax payments as business expenses on their books, or they make estimated tax payments under the business name instead of their personal names. Then the IRS letters start arriving with penalties for improper payment. Make sure all estimated federal and state tax payments are made by the actual owners, not the company.

Remember, unlike C corporations that pay a standard corporate tax rate, S corporation owners pay taxes at their personal income tax rates. Your effective tax rate depends entirely on your individual or joint tax bracket.

Important Deadline Reminder

If you’re considering making an S corporation election for 2026, time is running short. The deadline is generally March 15th of the tax year for which you want the election to take effect. If this interests you, reach out soon to avoid missing this window.

Partnerships

Partnerships filing Form 1065 include traditional partnerships, multi-member LLCs, limited liability partnerships, and unincorporated businesses with multiple partners. The basic tax structure works similarly to that of S corporations, in that income passes through to owners via K-1 forms.

Owners receive their K-1, report the business income on their personal Form 1040, and pay federal income taxes (plus state income taxes in most states) based on their individual tax brackets.

The Self-Employment Tax Difference

Here’s the key distinction between partnerships and S corporations: partnership income is subject to self-employment tax. This means in addition to regular income tax, partners must pay self-employment taxes to cover Medicare and Social Security on their share of business income, up to certain income thresholds. The exact amount varies based on how much you’ve already contributed to Social Security and Medicare through W-2 wages or other self-employment income.

The IRS adjusts these thresholds annually, so the calculation is somewhat case-by-case. This self-employment tax difference is precisely why many businesses choose to make an S corporation election. It can result in significant tax savings for profitable businesses.

Just as with S corporations, any business funds used to pay the owners’ personal tax liabilities are treated as owner draws rather than business expenses or liabilities. For more information on filing and tax requirements for partnerships, the IRS has a page dedicated to them: https://www.irs.gov/businesses/partnerships

Sole Proprietorships

Sole proprietorships, single-member LLCs, and certain husband-and-wife businesses file Schedule C as part of their Form 1040 tax return. Unlike the other entity types, Schedule C isn’t a separate tax return; it’s an attachment to your personal tax return.

You’ll use Schedule C to report business income for any sole proprietorship, unincorporated single-owner business, or disregarded entity. The Schedule C works similarly to Form 1065, with one major difference: instead of splitting income among multiple partners via K-1 forms, all income, expenses, and profits and losses are claimed by a single person on a single tax return.

Tax Obligations for Schedule C Filers

Like partnership owners, sole proprietors are responsible for both federal and state income taxes (in most states) plus the self-employment tax. The business itself has no tax liability or tax expense. Everything is determined by the owner’s personal tax bracket. This is a schedule attached to your individual tax returns.

If you’re in the 22% tax bracket, your business income is taxed at 22%. If you’re at 35% or 10%, that’s the rate applied to your business income. It’s that straightforward.

The Bottom Line: Who Pays What?

Let’s summarize the key takeaway: C corporations filing Form 1120 are the only business entity type with direct corporate tax liability and corporate tax expenses. Every other structure (S corporations, partnerships, and sole proprietorships) operates as a pass-through entity.

For pass-through entities, the business has no tax expense or liability. All tax obligations fall to the ownership, and taxation is based on the owners’ personal tax brackets. While strategies like S corporation elections can optimize your tax situation, this framework helps you understand the fundamental tax structures for each entity type.

To have a better idea of when you need to pay your taxes for your entity type, read our blog on tax deadlines: https://www.waterfordbusinesssolutions.com/when-are-my-tax-deadlines/

Need Help Getting Ready for Tax Season?

If you’re reading this in 2026 and still need to get your books in order or have questions about your tax filing, it’s not too late. We’d be happy to set up a free tax consultation to review your situation and create a plan to get your company’s taxes filed on time. At Waterford Business Solutions, we’re committed to helping you understand your business finances. We publish new videos every Monday covering tax strategies, tax savings, business accounting, and financial management. Whether you’re navigating this tax season or planning for the year ahead, we’re here to help you become confident in managing your company’s finances.

Have questions or need personalized guidance? Reach out to us at info@waterfordbusiness.com or call 864-351-0852. We’re here to help you truly understand your business’s financial picture.