S-Corporations Tax Savings for Small Businesses
The deadline to select the S-Corporation status from the federal government
16 March 2009. Now is the time to consider whether your company should create a LLC or this tax election.
What is an S-Corporation? What are the benefits?
An S-Corporation started out as a C-corporation or LLC. Selecting S-Corporation tax to avoid the traditional “double-taxation” by the company to make profits to “pass through” and are reported on each shareholder’s tax return. LLCs can benefit from the tax as an S-Corporation with the self-employment taxes on wages paid to the owner (s).
Self-employment tax savings
In an S-Corporation, only earnings paid to the owner as salary is subject to salaries tax. Money left in the business for reinvestment or distributed to shareholders as a dividend is not subject to self employment tax.
Maria is the only owner in the sale so that is $ 90,000. After that he pay the costs & expenses, profits, he is $ 60,000.
As the sole owner, he was required to pay self employment tax of 15.3% in the $ 60k of profit equates to $ 9180.
Now, let us assume Maria formed a S-Corporation for a business to him, and chose to pay him $ 35k for the year of salary, and take advantage of the remaining $ 25K through distribution. He still get the same $ 60k in profit.
But, let’s see the tax situation. Because the company only pay Social Security & Medicare taxes on wages, it is only liable for $ 5355, saving more than $ 3800 in taxes
