Tuesday, September 22, 2009

S-Corporations Can Reduce Self - Employment Taxes for Small Businesses

Is there a way to reduce the amount you pay for self-employment taxes on your small business?  An S-Corporation may be the answer for you.  An S-corporation is formed in the same manner as a C-Corporation.  However, once the corporation is formed you must elect to be taxed as an S-Corporation for tax purposes under Subchapter S of the Internal Revenue Code.  You then pass-through the income and expense items of your corporation to your personal return where it is taxed at your individual rates.

So what is the advantage of this structure over just operating as a sole proprietor?   Well, as a sole proprietor you pay self employment tax on all of the income you make fully up to the FICA limit, and Medicare on the entire amount with no cap.  However, with an S Corporation you only pay self employment taxes up to the salary you claim.  What is the catch?  You need to at least pay yourself a reasonable salary amount, which will vary for each individual/business.  Your tax advisor can help you determine this amount.  The bottom line is that you can save a significant amount with this technique.  So it is worth taking a look to see if it can help you with your own situation.

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