"Should my company be an S corporation?"
This is a question we get quite a bit. We'll probably do an entire podcast just on S corporations. So be watching for that on Spotify and Apple Podcasts.
The important thing to know about the S election is it is just an election with the IRS. It doesn't actually change the type of entity. Meaning, if your business is an LLC or a corporation that doesn't change. Electing to be an S corporation is just telling the IRS, "Hey, we'd like to be taxed as an S corporation."
The major difference between a C corporation and an S corporation is that a C corporation pays tax at the corporate level where an S corporation is a pass-through entity. Meaning in an S corporation each owner would pay tax on their share of the earnings and deduct their share of the losses on their personal tax return. Where an S corp becomes attractive is if you have an LLC or partnership that is not an S corporation, the owners pay self-employment tax, which is social security and Medicare, up to 15.3% tax on all the earnings.
If you have an S corporation, the owners can actually take a salary and any earnings above and beyond the salary are not subject to self-employment tax. To give an example of that if you had a partnership and it earned $100,000 then you would pay 15.3% in Social Security, and Medicare, which comes to $15,300 on top of your income tax.
However, if you were an S corporation and you pay yourself a salary $50,000, the other $50,000 profit would come out without Social Security and Medicare. So you're looking at a savings of around $7,500.
Electing to be an S-corp is a useful tool. You really should be doing a certain amount of business or making enough profit to justify the added tax return and payroll cost that go along with it, but it's something you should talk to your accountant about. There are some instances where being an S-corp may not be the best choice.
Sometimes, if you have rental property, you may want to have those in a separate entity because there are some negative tax consequences to putting the rental property inside a corporation. But again, the best thing to do is talk to your accountant and go over your business plan and see if it aligns with your goals. It can be a great way to save save some money.
If you have any questions about your business, text them to me at 501-762-0116.
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