What Is an S-Corporation?
As defined by the IRS, S-corporations are “corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” In other words, designating your business as an S-corporation alters the way your company and the company’s owners are taxed, passing the profits, losses, credits, and deductions on to their shareholders. This is why S-corporations fall under the broader label of “pass-through corporations.”
How You Are Paid
If you choose to register as an S-corporation, it’s important that you pay yourself a wage every year, instead of only taking the company’s profits as your own. This means that you, like any other employee in the company, will receive a regular paycheck and be issued a W-2 every year. Failing to do this can result in penalties and fines from the IRS if you are audited.
What Are the Benefits?
So how does registering as an S-corporation benefit you? Because income on S-corps is taxed differently, you can save a significant amount on your taxes every year. Let’s say your business is currently operating as a single-member LLC or partnership. Under this designation, you’re being taxed at the standard income tax rate; on top of that, you’re also paying self-employment tax on all income from your business.
But with an S-corp designation, you will only be taxed at the standard income rate. In 2017, the self-employment tax rate was an additional 15.3%, on top of your standard taxes, and that rate continues to rise. So you can imagine how much money you can save by registering your company as an S-corp.
Of course, an S-corporation is not the right designation for every small business. So if you’re uncertain whether or not registering as an S-corp is right for your company, feel free to contact The Accounting Guys. We’ll help you make the best decision for your company and help you to get the most money back when you file business taxes in Provo.