A Guide to S-Corporations
Updated: Oct 2
If your business is generating more than $40,000 of annual profit, you may be paying more in taxes than necessary.
One of the most effective tax-saving strategies available to small business owners is electing to have your business taxed as an S-Corporation. An S-Corporation can be an effective tax-saving strategy for many business owners, but the benefits should be evaluated based on the specific facts and circumstances of each business.
In this guide, we'll explain how S-Corporations work, when they make sense, and how they can potentially reduce your tax burden.
What Is an S-Corporation?
An S-Corporation is not a separate type of legal entity. Instead, it is a tax election that can be made by an LLC or corporation. Many small business owners start as a sole proprietorship or single-member LLC. By default, all of the business profits are generally subject to self-employment tax.
When a business elects S-Corporation taxation, part of the income is paid to the owner as wages and the remaining profit can be distributed as shareholder distributions. The key advantage is that shareholder distributions are generally not subject to self-employment tax.
Why Do Business Owners Elect S-Corp Status?
The primary reason is to reduce payroll and self-employment taxes. A sole proprietor generally pays self-employment tax on all business profits. An S-Corporation owner generally only pays payroll taxes on their reasonable salary. The IRS requires S-Corporation owners who actively work in the business to take a reasonable salary before taking distributions. Many small business owners can reduce their self-employment tax burden through a properly structured S-Corporation.
An S-Corporation may make sense if:
-Your business consistently earns more than $40,000 annually.
- You actively work in the business.
- You want to reduce self-employment taxes.
- You are willing to run payroll.
- You are interested in proactive tax planning.
It may not make sense if:
- Your business is still a side hustle.
- Annual profits are relatively low.
- You are generating losses.
- You do not want payroll responsibilities.
- The administrative costs exceed the potential tax savings.
How Rangeview Tax & Accounting Can Help.
Before electing S-Corporation status, it's important to determine whether the tax savings justify the additional compliance requirements. At Rangeview Tax & Accounting, we help business owners evaluate whether an S-Corporation election is the right fit for their business. Our process includes:
- Tax savings analysis
- Reasonable compensation planning
- S-Corporation election filing
- Payroll setup and compliance
- Ongoing tax planning
- Business advisory services
Every business is different. Before making an S-Corporation election, we recommend performing a detailed tax analysis to determine your projected savings and compliance requirements. If you're wondering whether an S-Corporation could reduce your tax bill, contact Rangeview Tax & Accounting to schedule a consultation.
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