Some of you may be asking what is an S Corporation? An S Corporation is the classification of a business entity for federal income tax purposes. It is a speical election submitted to the IRS and upon apporval, your LLC or Corporation will file it’s own tax return with the income or loss passing thru to your individual income tax retrun. The S Corporation does not pay any taxes, instead the tax is paid at the individual level when the owner(s) file their Form 1040.
What are some of the benefits of an S Corporation election? Well, for one the net income that flows thru to the individual is not subject to self-employment tax. In the case of a single member LLC or partnership return, the income passed thru to the owners are subject to self-employment tax equal to 15.3% of the net income. The income is also subject to federal income tax. Distributions are also tax free unlike in the case of a C Corporation where there is double taxation, that is tax on the income of the corporation and an additional tax on the dividends paid to the owners. There is no tax on the distributions paid to S Corporation owners.
The S Corporation represents a significant tax savings as described above, but there are some rules that need to be followed. For one, S Corporation owners must draw a reasonable salaray based on the corporation’s net income. Distributions to owners must be based on ownership percentages, there can be only one class of stock and owner’s must be U.S. residents. Non-Residents cannot own shares in S Corporation stock. An Election to be treated as an S Corporation must be timely filed although there are some exceptions where late relief is granted.
Please contact David Hernandez, CPA, PA for more information.