Why Choose an S-Corp for Tax Purposes?
If you’re a small business owner, electing to be an S-Corp for tax purposes can save you money on taxes. But how does it work, and is it worth it for your business? Let’s break it down.
Benefits of an S-Corp for Taxes
- Save on Self-Employment Taxes: As an S-Corp, only your salary is subject to Social Security and Medicare taxes, not your total business profits.
- Pass-Through Taxation: Profits pass through to your personal tax return, avoiding the double taxes on dividends that a corporation (Inc.) shareholder would otherwise owe.
- Credibility and Flexibility: S-Corp status signals professionalism and allows for flexible distributions to owners by treating LLC members or partners as shareholders, avoiding certain rules of partnership tax that could be costly. This is particularly true if the company needs to take on debt.
These tax savings can add up significantly, especially for businesses with consistent profits. However, the key is to set a reasonable salary for yourself. If the IRS ever chooses to audit your return, you’ll want a professional like Jay My CPA in your corner with a reasonable salary being paid to your S-corp shareholders.
Who Should Consider an S-Corp?
An S-Corp might be right for you if:
- You Earn Consistent Profits: If your business earns enough to pay a reasonable salary and leave additional profits, an S-Corp can reduce your tax liability.
- You’re Looking for Growth: S-Corps work well for businesses planning to scale and add shareholders.
For small business owners who already have their business structure set, the S-Corp election is a powerful tool to optimize taxes. However, it’s not a one-size-fits-all solution, and for some companies it can be more costly than beneficial. Consult a CPA to assess if it fits your unique situation.
Need Help Filing as an S-Corp?
Electing S-Corp status can be complex. Contact Jay My CPA to find out if this strategy is right for you!
