What is an S Corp?
S corporations, S Corps, are generally not subject to corporate taxes as they are pass through entities. In essence, that is what is an S Corp. An S Corp is exempt from federal income tax other than tax on certain capital gains and passive income. The S Corp is considered a “pass-through” taxation entity like a limited liability company (LLC). The S Corp’s income, or net losses, passes through the corporation to shareholders for federal income tax purposes. S Corp profits are taxed each year on each shareholder’s Form 1040. An S Corp’s shareholders are subject to pay taxes on all the company profits even if they do not receive a dime
Among the benefits of electing to be taxed as an S Corp is the potential tax savings related to self-employment taxes (i.e. Social Security and Medicare). A shareholder-employee of the corporation only pays employment taxes on their salary or other income they are paid in their capacity as employee. The remaining profits can come out as a dividend.
Those remaining profits for the same shareholder could not be subject to the self-employment tax. Short and sweet: this saves on taxes. You cannot pay yourself an unreasonably low salary to avoid self-employment taxes, however. The IRS has stated that S Corps must pay their shareholder-employees a reasonable compensation.
The ability to minimize self-employment tax can be a huge benefit, but it is very complex. Should you have questions about self-employment or income taxes, including the implications of your entity decision and IRS elections, you should consult your tax professional. What is an S Corp? That is a complicated question. But we can answer it.
The S Corp avoids double taxation, but shareholders must pay income tax on all profits even if the S Corp decides to retain the profits. All profits are deemed to be distributed to shareholders.
Contact us HERE for more information and to speak with an attorney about your options when developing your business. The above does not constitute legal advice nor create an attorney client privilege. It is merely meant for entertainment purposes and general information.