I recently saw a statistic that
approximately 85 percent of small businesses are set up as S Corporations. There are three great tax reasons why so many
tax advisors recommend small business owners use an S Corp:
1.To
reduce self-employment tax.
If your business is set up as a sole-proprietorship or partnership, all
of your profits will be subject to Social Security and Medicare taxes. In a Sub-S Corporation, the
shareholder-employee only pays Social Security and Medicare Taxes on their
salary. Any profits above that are taxed
at ordinary tax rates. You must make
sure that you pay yourself a fair salary.
Check out the video below for a more detailed description.
2. Shift
income to lower-bracket taxpayers. You can use the structure of an S Corporation
to shift income to lower-bracket shareholders.
You can gift shares in your corporation to your children, for example,
who are most likely in a lower tax bracket.
This is a good way to save taxes on the amount of money you were going
to give them.
3. Avoid
audits.
S Corporations are audited by the IRS much less frequently (0.5 percent
of all S Corps) than businesses that report their income as a sole proprietor
on Schedule C (3.6 percent of businesses with over $100,000 in sales). The high cost associated with IRS audits and
the amount of time they waste are legitimate reasons to choose to be taxed as
an S Corp.