Social Security Wage Base for 2006, after which no further Social Security tax is owed). Employee salaries are subject to FICA tax (Social Security & Medicare tax)—currently 15.3 percent (6.2% Social Security paid by the employee; 6.2% Social Security paid by the employer; 1.45% employee Medicare and 1.45% employer Medicare). The distribution of the additional profits from the S corporation will be done without any further FICA tax liability. If for some reason, Bob (as the majority owner) were to decide not to distribute the money, both Bob and John would still owe taxes on their pro-rata allocation of business income, even though neither received any cash distribution. To avoid this "phantom income" scenario, S corporations commonly use shareholder agreements that stipulate at least enough distribution must be made for shareholders to pay the taxes on their distributive shares. Conversion from C corporation S corporations that have previously been C corporations may also, in certain circumstances, pay income taxes on untaxed profits that were generated when the corporation operated as a C corporation. This is very common with uncollected accounts receivable or appreciated real estate. For example, if an S corporation that was formerly a C corporation sells an appreciated asset (such as real estate) and the appreciation occurred during the time the corporation was a C corporation, the S corporation will probably pay C corporation taxes on the appreciation—even though the corporation is now an S corporation. This Built In Gain (BIG) tax rate is 35% on the appreciated property, but is only realized if the BIG property is sold within 10 years (starting from the first day of the first tax year of conversion to S-Corp status). The American Recovery and Reinvestment Act of 2009 reduced that 10-year recognition period to seven years (if that seventh year precedes either 2009 or 2010). The Small Business Jobs Act of 2010 further reduced the recognition period to five years. Federal tax Taxable income to shareholders If a shareholder owns more than 2% of the outstanding stock, amounts paid for group health insurance for that shareholder are included on their W-2 as "wages". The same applies to amounts contributed to Health Savings Accounts (HSA). Filing Form 1120S Form 1120S generally must be filed by March 15 of the year immediately following the calendar year covered by the return or, if a fiscal year (a year ending on the last day of