Where the S‑Corporation Must File

• The S‑corp must file in each state where it has income tax nexus and state‑source income. Many states use “factor presence” nexus standards—e.g., having a defined level of property, payroll, or receipts in the state—to determine whether business activity taxes apply. Numerous states have adopted factor presence or similar economic nexus rules for income/franchise taxes Uniformity Developments — Factor Presence Nexus.

• Even if a state uses separate income/franchise tax rules, the same principle applies: the S‑corp files where it has taxable presence and apportioned receipts. The federal S‑corp filing (Form 1120‑S) is separate from state filings; states set their own nexus thresholds and filing requirements 2024 Instructions for Form 1120‑S; S Corporations.

• Sales/use tax obligations can arise under the Supreme Court’s Wayfair decision, which allows “economic nexus” based on sales/transactions into a state even without physical presence. While Wayfair concerns sales/use tax, many states use analogous economic nexus concepts for business activity taxes—so your S‑corp should assess both income/franchise and sales/use tax filing responsibilities in each state where you make sales South Dakota v. Wayfair, Inc.; MTC Auditor Training—Economic Nexus & Marketplace Facilitator Laws.

Where the Owner Must File Personally

• Shareholders must file nonresident personal returns in each state where their S‑corp business income is sourced, unless a state allows and the shareholder participates in a composite filing or the entity pays a PTE tax on their behalf. The IRS confirms that S‑corp income flows to owners via Schedule K‑1 and is reported on the owners’ returns; states then tax the owners on their share of in‑state‑source income S Corporations; Partnerships (pass‑through reporting concept is similar).

• Whether an owner must file in a state hinges on how receipts are sourced. States generally use either cost‑of‑performance or market‑based sourcing for services and intangible receipts; most now use market‑based rules (assigning receipts to the customer’s location/where the benefit is received). The MTC’s model and survey show that the majority of states have moved to market‑based sourcing—so owners typically have filing obligations where customers are, even without significant in‑state operations Review of Market Sourcing Issues (MTC).

• If the S‑corp pays a state PTE tax (elective or mandatory) and the state grants owner‑level credits or exclusions, owners may avoid separate state tax on that income, though they may still need to file informational returns depending on state rules. The MTC tracks state PTE regimes and credits; federally, IRS Notice 2020‑75 confirms that correctly paid entity‑level state income taxes are deductible at the entity level and not limited by individual SALT caps (this affects the federal return but not whether a state requires an owner filing) State Pass‑Through Entity (PTE) Taxes — MTC; Notice 2020‑75.

How States Determine Source of Income (Apportionment and Sourcing)

• Apportionment and receipts sourcing rules decide which states get to tax your business income. The MTC’s model and state practices show that most states now source service and intangible receipts to the market, not to the location of costs. A smaller number still use cost‑of‑performance (place of performance or predominant cost of performance). Know which approach each state applies to your revenue streams Review of Market Sourcing Issues (MTC).

• Factor presence nexus (property/payroll/receipts thresholds) may trigger entity filing obligations even with limited physical presence. The MTC identifies states adopting factor presence standards for business activity taxes; those standards inform where both the S‑corp and the owners could have filing obligations Uniformity Developments — Factor Presence Nexus.

Withholding, Composite Returns, and PTE Taxes

• Many states require pass‑throughs to withhold on nonresident owners’ shares or offer composite returns that can satisfy owners’ filing obligations in certain cases. Requirements vary by state; check the state’s rules to determine if separate individual filings are still required S Corporations (pass‑through framework; state rules control owner withholding/composite filings).

• States increasingly offer elective (or mandatory) PTE taxes. When the S‑corp pays PTE tax and the state grants owner‑level credits or exclusions, the owner may avoid double tax while the entity takes a federal deduction for the state tax (per Notice 2020‑75). Filing mechanics differ: some states still expect informational returns from owners, while others allow the entity filing to satisfy the owner’s obligation State Pass‑Through Entity (PTE) Taxes — MTC; Notice 2020‑75.

Registration and Other Obligations (Sales/Use and Marketplace Rules)

• Beyond income tax filings, evaluate sales/use tax obligations under Wayfair. Economic nexus rules apply broadly; marketplace facilitator laws can shift collection responsibilities to platforms, but direct sellers may still have returns and remittance duties once thresholds are met South Dakota v. Wayfair, Inc.; MTC Auditor Training—Economic Nexus & Marketplace Facilitator Laws.

Practical Filing Checklist

• Identify nexus states for the S‑corp: property, payroll, and receipts thresholds (factor presence), registration requirements, and filing due dates. Use the MTC’s factor presence references to confirm which states apply economic nexus for business activity taxes Uniformity Developments — Factor Presence Nexus.

• Map sourcing rules revenue‑by‑state: confirm whether each state uses market‑based sourcing (most do) or cost‑of‑performance for services and intangibles, then assign receipts accordingly Review of Market Sourcing Issues (MTC).

• Determine owner filings: for every state with sourced income on the K‑1, confirm whether the state requires separate nonresident returns, allows composite returns, requires withholding, or offers a PTE election that changes owner filing requirements S Corporations; State Pass‑Through Entity (PTE) Taxes — MTC.

• Coordinate federal reporting: ensure the S‑corp deduction of properly paid state income taxes (if using PTE regimes) is reflected correctly in non‑separately stated income, and owners receive accurate K‑1s for multi‑state reporting 2024 Instructions for Form 1120‑S; Notice 2020‑75.

Illustrative Examples

• A services S‑corp with customers in CA, NY, and IL: Under market‑based sourcing, receipts are assigned to the customer location—so the entity files in those states if economic or factor presence nexus is met. Owners then file nonresident returns in CA, NY, and IL for their share of in‑state‑source income (unless covered by composite or PTE). Each state’s thresholds may differ, so the filing footprint can include additional states where the business has property/payroll Review of Market Sourcing Issues (MTC); Uniformity Developments — Factor Presence Nexus.

• A multi‑channel retailer shipping nationwide: Sales/use tax filings are driven by Wayfair economic nexus thresholds and marketplace facilitator laws; income/franchise filings depend on factor presence and apportionment. Owners file nonresident returns wherever the S‑corp has taxable income sourced by apportionment, subject to composite/PTE regimes South Dakota v. Wayfair, Inc.; MTC Auditor Training—Economic Nexus & Marketplace Facilitator Laws.

Bottom Line

An S‑corp must file in each state where it has nexus and state‑source income; its owners must file nonresident returns in every state where their K‑1 shows state‑sourced S‑corp income, unless composite or PTE filings alter that requirement. Most states now use market‑based sourcing for services/intangibles and widely apply factor presence/economic nexus standards, expanding both entity and owner filing footprints. To get it right, build a state‑by‑state matrix of nexus thresholds, sourcing rules, and owner filing options—and align federal reporting so entity deductions and K‑1 allocations are consistent with multi‑state filings S Corporations; Uniformity Developments — Factor Presence Nexus; Review of Market Sourcing Issues (MTC); State Pass‑Through Entity (PTE) Taxes — MTC; 2024 Instructions for Form 1120‑S; Notice 2020‑75; South Dakota v. Wayfair, Inc..