If you own a small business and have been wondering about the advantages of incorporating, you may have thought about filing as an S-corporation. The S corporation allows owners to avoid double-taxation. Simply put, traditional corporation owners and shareholders pay tax twice, once on the business level, and once on their share distribution. The IRS allows some small businesses to file as S-corps and pay only at the personal level. This may be a helpful consideration as one of the key elements of your small business tax planning may be minimizing the financial obligation you have to the federal and state governments.
There may be many advantages to becoming an S-corp. But it's important to know the basics before you begin delving into areas like S corporation tax planning and related topics.
If you are interested in a lower tax bill, you may want to consider the following information about S corporations:
- S corporations are unique entities in the perceptions of the federal government. They operate as regular corporations, but the owners and shareholders pay tax at the personal level.
- S-corps are pass-through organizations, meaning there is no corporate-level taxation.
- Still, the S-corp files an 1120-S corporate return, just like all other corporations.
- If you decided to opt for S-corp status may be helpful to seek expert small business tax planning advice.
- On the form K-1, each shareholder's profit or loss is reported.
- Individuals use line 17 on their Form 1040 to report distributions from an S-corp.
- As an owner, you are only taxed on your percentage of the distributive share of profits.
- Tax planning for S - Corps is much less complex than traditional corporate tax planning, primarily because the owners are only taxed at the personal, not corporate level.
- Owners don't pay self-employment tax either because they are considered "employees" and receive either a K-1 distribution or W-2 wages, or both. Neither form of income falls under the self-employment tax laws.
There's a lot more to the S corp picture than that, but if you are new to the topic, those basics will at least help you understand why so many "small business tax planning" seminars and webinars talk about the advantages of becoming an S corporation. Tax planning for S Corps typically involves setting targets for share distributions and making sure that all federal forms are filed correctly and in a timely fashion.
Moving Forward as an S-Corporation
If you decide to file as an S corp, you may have an overall smoother route of doing business. Still, small business strategic tax planning may be complex for you, especially when there are multiple owners in your company, or when a sole owner isn't sure about making a move to S-corp status. Fortunately, here at Fusion CPA, we work with small business owners every day, some of whom opt to file as S-corps. For owners whose corporations generate large profits, the savings of choosing S-corp status may result in paying the IRS much less each year. As a part of our CFO business advisory service, our team of experienced small business accountants can assist you in choosing your entity type. We also offer accounting and bookkeeping services that we may be able to tailor to your unique industry. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.