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What is a S Corporation?
An "S" Corporation is a general corporation (C corporation) that has elected a special tax
designation by the Internal Revenue Service. The S designation is chosen after the corporation
has been formed and allows it to avoid double taxation. The designation allows the owners or
shareholders to be taxed only at the individual level, rather than at the corporate and individual
levels. All income for the business is only taxed at the individual shareholder or owner level. This
designation is often ideal for small businesses and entrepreneurs since it prevents double
taxation while providing limited liability and an enduring structure.
Note: While the S Corporation features similar pass through taxation to an LLC, in the area of
self-employment taxes an S Corporation can have an advantage over an LLC. The
compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment
tax, but not on the profits automatically allocated to them as a shareholder. This can be an
advanced and aggressive tax strategy, so be sure to consult with the appropriate tax and legal
specialists before pursuing it.
The one drawback is that S Corporations must have shareholders who are US Citizens or US
Residents
After filing for a S Corporation, you can decide to go back to the C Corporation. But you cannot
go back to the S Corporation status for five (5) years.
When to use an S Corporation
When owners live in a state with no personal income tax.
Have one or two individuals that own the company (up to 35).
Have sales less than $250,000.00.
Want each shareholder for Corporation Income
Tax Year must end on December 31.
No non US Citizens as shareholders.
Other corporations cannot own an S Corporation.
designation by the Internal Revenue Service. The S designation is chosen after the corporation
has been formed and allows it to avoid double taxation. The designation allows the owners or
shareholders to be taxed only at the individual level, rather than at the corporate and individual
levels. All income for the business is only taxed at the individual shareholder or owner level. This
designation is often ideal for small businesses and entrepreneurs since it prevents double
taxation while providing limited liability and an enduring structure.
Note: While the S Corporation features similar pass through taxation to an LLC, in the area of
self-employment taxes an S Corporation can have an advantage over an LLC. The
compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment
tax, but not on the profits automatically allocated to them as a shareholder. This can be an
advanced and aggressive tax strategy, so be sure to consult with the appropriate tax and legal
specialists before pursuing it.
The one drawback is that S Corporations must have shareholders who are US Citizens or US
Residents
After filing for a S Corporation, you can decide to go back to the C Corporation. But you cannot
go back to the S Corporation status for five (5) years.
When to use an S Corporation
When owners live in a state with no personal income tax.
Have one or two individuals that own the company (up to 35).
Have sales less than $250,000.00.
Want each shareholder for Corporation Income
Tax Year must end on December 31.
No non US Citizens as shareholders.
Other corporations cannot own an S Corporation.
Social Security Taxes
Whenever an employer pays salary or wages to an employee, the employer and the employee
both must bay Social Security tax (FICA).
The S-Corporation can be used to allow you to reduce or totally eliminate the payment of Social
Security Tax. Its all about the distinction between "dividend and wages".
The corporation can decide whether to pay you, a shareholder and officer, a dividend or a
salary. FICA tax is due and payable on salary and wages. No FICA tax is to be withheld or paid
in connection with payment of a dividend. Let us say your S-Corporation makes $30,000 in a
given year. Why not pay yourself $6,000 as salary and $24,000 as a dividend. You may even
borrow the $24,000. That is also tax free.
The only drawback is if your corporation is planning or has a pension or profit-sharing plan for
you. The amount you can contribute to your pension plan may be a percentage of your salary
or wages, not of your dividends.
Whenever an employer pays salary or wages to an employee, the employer and the employee
both must bay Social Security tax (FICA).
The S-Corporation can be used to allow you to reduce or totally eliminate the payment of Social
Security Tax. Its all about the distinction between "dividend and wages".
The corporation can decide whether to pay you, a shareholder and officer, a dividend or a
salary. FICA tax is due and payable on salary and wages. No FICA tax is to be withheld or paid
in connection with payment of a dividend. Let us say your S-Corporation makes $30,000 in a
given year. Why not pay yourself $6,000 as salary and $24,000 as a dividend. You may even
borrow the $24,000. That is also tax free.
The only drawback is if your corporation is planning or has a pension or profit-sharing plan for
you. The amount you can contribute to your pension plan may be a percentage of your salary
or wages, not of your dividends.