S-Corp Tax Benefits

Electing S-Corp taxation avoids corporate double taxation and can save on self-employment taxes. In general, S-Corp taxation is best suited for business generating $75,000 - $250,000 in profits per owner.

#1 Benefit For Corporations: Avoid Double Taxation

Corporations are taxed as a C-Corp unless they elect to be taxed as an S-Corp. A C-Corp pays corporate taxes on its profits, then owners pay personal income taxes on their distributions.

S-Corp tax election results in “pass-through taxation”. Corporate income, losses, deductions, and credits "pass through" the business to the owners' tax returns. Then each owner pays corporate income taxes on his personal income taxes. Each owner pays his portion of corporate income taxes at his personal income tax rate.

#1 Benefit for LLCs: Save on Self-Employment Taxes

S-Corp election is generally the best choice for LLCs producing $75,000 - $250,000 in profits per owner. This is because of how it saves money on self-employment taxes.

You are probably familiar with paying 15.3% for Social Security, Medicare, and self-employment taxes on your entire profits. S-Corp election lets you split your profits into “shareholder wages” (subject to 15.3% self-employment taxes) and “distributive share” (NOT subject to 15.3% self-employment taxes). Active owners in an S-Corp must pay themselves a reasonable salary, but realize a 15.3% savings on the rest of their retained profits.

Qualifying for S-Corp Election

Filing Form 2553 Election by a Small Business Corporation with the IRS applies for recognition under IRC Chapter 1 Subchapter S. Only certain businesses qualify to elect to be taxed as an S-Corp.

Continue reading "S-Corporation Requirements" to learn if your business qualifies.