The deadline to elect S-Corporation status from the federal government is
March 16, 2009. Now is the time to consider whether your corporation or LLC should make this tax election.
What is an S-Corporation? What are the benefits?
An S-Corporation starts out as a C-corporation or LLC. Choosing S-Corporation taxation avoids traditional “double-taxation” for corporations by allowing profits to “pass-through” and be reported on shareholder’s individual tax returns. LLCs can benefit from being taxed as an S-Corporation by reducing self-employment taxes on salaries paid to the owner(s).Self-employment tax savings
In an S-Corporation, only earnings paid to an owner as salary is subject to payroll taxes. Any money left in the business for reinvestment or distributed to the shareholder as a dividendis not subject to self-employment tax.
Maria is a sole proprietor bringing in sales of $90,000. After she pays her costs & expenses, her profit is $60,000.
As a sole proprietor, she is required to pay self- employment tax of 15.3% on this entire $60K of profit, which equates to $9,180.Now, let’s assume Maria formed an S-Corporation for her business, and chooses to pay herself $35K for the year in salary, and take the remaining $25K of profit through a distribution. She still earns the same $60K in profit.But, let’s look at the tax situation. Because corporations only pay Social Security & Medicare taxes on salaries, she’s only liable for $5,355, saving over $3,800 in taxes!