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It's important to note, however, that an S corporation must file an annual tax return with the IRS, specifically Form 1120S, even though it itself doesn't pay income tax.
The Taxation Mechanism of S Corporations
Key Features
No Federal Income Tax at the Corporate Level: The IRS does not tax the S corporation directly on its earnings. Instead, all profits, losses, deductions, and credits are passed through to the shareholders.
Shareholders Report Income: Each shareholder reports their share of income or losses on their individual tax return, proportional to their ownership stake.
Form 1120S: This is the tax form that S corporations use to report income, expenses, and other financial details annually for informational purposes.