How to File a South Carolina Composite Return

A pass-through entity doing business in South Carolina can file a single South Carolina composite return on behalf of its nonresident partners, shareholders, or members instead of asking each one to file a separate state return. The entity uses Form SC1040 with the Composite Return box checked, calculates each participant’s tax on that participant’s share of South Carolina income, and remits the combined total to the South Carolina Department of Revenue (SCDOR).¹ A separate 5% withholding obligation on nonresident income applies regardless of whether a composite return is filed, and the two sets of rules interact.

Who Can Be Included

Partnerships, S corporations, and LLCs taxed as either can file a composite return for two or more nonresident individuals, trusts, or estates that receive income from the entity. All participants must share the same tax year.¹

Corporate partners and corporate members cannot be included. If one of the owners is itself a corporation, that corporation handles its own South Carolina tax obligation separately.¹

Should a Nonresident Opt In?

Participation is voluntary on the nonresident’s side. Being included satisfies that person’s South Carolina income tax obligation for the entity’s income, but it means giving up the ability to claim individual deductions or credits on a separate South Carolina return. For a nonresident with straightforward pass-through income and no other South Carolina activity, the composite route is painless. For someone with itemized deductions, credits, or other South Carolina-source income, filing individually may produce a lower tax bill. Once a nonresident is included in a composite return for a given tax year, that person generally cannot switch to filing separately for that same year.

How to Prepare the Return

The entity files on Form SC1040, the same form individuals use, with the Composite Return box checked on the front page. Schedule NR is attached to report each nonresident’s share of South Carolina income.¹²

A few details trip up first-time filers. The return goes under the entity’s name and federal EIN, not any individual participant’s information. The filing status box is marked Single regardless of any participant’s actual marital status. Tax is calculated separately for each participant on that participant’s share of South Carolina income using the state’s graduated rate schedule, and the individual amounts are then added together for the total tax due. The return is not computed as one lump sum. A supporting schedule showing the separate per-participant calculations must be attached, and an authorized partner, officer, or member must sign.¹

Any entity owing $15,000 or more in connection with a SCDOR return must file and pay electronically.³

Due Date and Extensions

The composite return is due by the 15th day of the fourth month after the close of the participants’ tax year. For calendar-year filers, that is April 15.¹

To extend the deadline, the entity can pay any estimated balance due through SCDOR’s MyDORWAY portal, which submits the extension request automatically with no separate form. Alternatively, the entity can file a paper Form SC4868 with the Composite Filer box checked.¹

Estimated Tax Payments

If the composite return is expected to show a tax liability of $100 or more, the entity must file a Declaration of Estimated Tax. Payments are made using Form SC1040ES with the Composite Filer box checked, or online through MyDORWAY.³ Missing a quarterly deadline triggers interest on the underpayment, so entities with meaningful nonresident income should build these dates into their tax calendar.

Nonresident Withholding Still Applies

Separate from the composite return, South Carolina requires a pass-through entity to withhold 5% on each nonresident partner’s or shareholder’s share of South Carolina taxable income, whether or not that income is actually distributed. The entity remits the withheld amount to SCDOR by the 15th day of the third month after the close of its tax year.⁴

Amounts withheld are credited to each nonresident when the composite return is filed on their behalf, so in practice the withholding functions as a prepayment against the composite tax.

A nonresident can avoid the 5% withholding by filing an affidavit with SCDOR agreeing to submit to South Carolina’s personal jurisdiction for determining and collecting state taxes, estimated taxes, and related interest or penalties. SCDOR can revoke the exemption if the nonresident does not follow through. Tax-exempt organizations under IRC Section 501(a) are also exempt from withholding; the organization must give the entity a statement with its name, federal ID, applicable IRC section, and a copy of its IRS exemption letter.⁴

Penalties for Getting It Wrong

Late filing costs 5% of the tax due per month or partial month, up to 25%. Late payment costs 0.5% per month, up to 25%.⁵ The late-filing penalty is ten times the late-payment penalty, so filing on time matters even when the tax cannot be paid in full.

Negligence or disregard of regulations adds 5% of the underpayment plus 50% of the interest that accrues on it.⁵ A substantial understatement of tax carries a penalty of 25% of the underpayment attributable to the understatement. Unpaid tax accrues interest from the original due date; SCDOR may waive up to 30 days of interest for administrative convenience.⁶

Amendments, Records, and Federal Changes

To correct an error, file a new SC1040 with the Amended Return box checked and attach Schedule AMD explaining what changed. South Carolina does not use a separate SC1040X.⁷

A refund claim must be filed within three years from the date the return was originally filed or two years from the date the tax was paid, whichever is later. If the IRS adjusts the entity’s federal taxable income on audit, the entity must notify SCDOR in writing within 180 days of the final federal determination; missing that window exposes the entity to additional penalties and interest on any resulting South Carolina underpayment.⁸

Keep supporting records for at least three years after filing, including participant consent documentation, income allocation worksheets, withholding calculations, and proof of payment.⁹

1
South Carolina Department of Revenue. I-348 Composite Return Filing Instructions
2
South Carolina Department of Revenue. South Carolina Schedule NR Instructions
3
South Carolina Department of Revenue. SC1040ES – Individual Declaration of Estimated Tax
4
South Carolina Legislature. South Carolina Code 12-8-590 – Tax Withholding on Distributions to Nonresident Shareholders and Partners
5
South Carolina Legislature. South Carolina Code 12-54-43 – Civil Penalties
6
South Carolina Legislature. South Carolina Code Title 12 Chapter 54 – Uniform Method of Collection and Enforcement of Taxes
7
South Carolina Department of Revenue. Sch. AMD – Amended Return Schedule
8
South Carolina Legislature. South Carolina Code Title 12 Chapter 54 – Uniform Method of Collection and Enforcement of Taxes – Section 12-54-85
9
Internal Revenue Service. How Long Should I Keep Records