Why Your Business Should Be an S-Corp
Why are roughly 85-90% of small business corporations electing to file as an S-Corp?
There are three big reasons. First, it eliminates double taxation. This occurs with a regular C-corporation because income is taxed once at the corporate level and dividends are taxed again at the personal level. You can mitigate this by paying salaries and rent, but the IRS is on the lookout for what they call “excess earnings” and “excess rents” that they claim is really just disguised dividends.
The second big reason is that, unlike a sole proprietor or a partnership, earnings from an S-corporation are not subject to self-employment tax (15.3% of the first $117,000 for 2014). This means that if your business makes $117,000 you will pay $17,901 in Social Security and Medicare tax in addition to normal income taxes. Even worse, the 2.9% Medicare tax has no income limit.
With an S-corporation you do not pay on your profit after your salary. The IRS knows this rule and does not like it, so make sure you pay the owner a “fair” salary. They are serious about curbing what they see as abuse.
The third big reason is that S-corps are audited at a much lower rate than sole proprietors. In 2011 the IRS audited 4.1% of all sole proprietors with sales over $100,000. It only audited 0.4% of S-Corps with similar income.
Check with a tax professional experienced with small business needs before you make the change to ensure that S-corp status is the best choice for you. Like all things in the tax law, one size does not fit all.
Why are roughly 85-90% of small business corporations electing to file as an S-Corp?
There are three big reasons. First, it eliminates double taxation. This occurs with a regular C-corporation because income is taxed once at the corporate level and dividends are taxed again at the personal level. You can mitigate this by paying salaries and rent, but the IRS is on the lookout for what they call “excess earnings” and “excess rents” that they claim is really just disguised dividends.
The second big reason is that, unlike a sole proprietor or a partnership, earnings from an S-corporation are not subject to self-employment tax (15.3% of the first $117,000 for 2014). This means that if your business makes $117,000 you will pay $17,901 in Social Security and Medicare tax in addition to normal income taxes. Even worse, the 2.9% Medicare tax has no income limit.
With an S-corporation you do not pay on your profit after your salary. The IRS knows this rule and does not like it, so make sure you pay the owner a “fair” salary. They are serious about curbing what they see as abuse.
The third big reason is that S-corps are audited at a much lower rate than sole proprietors. In 2011 the IRS audited 4.1% of all sole proprietors with sales over $100,000. It only audited 0.4% of S-Corps with similar income.
Check with a tax professional experienced with small business needs before you make the change to ensure that S-corp status is the best choice for you. Like all things in the tax law, one size does not fit all.