S Corporation Taxes

Much like owners of a partnership, shareholders of an S-corporation are taxed on their allocated share of the business’s profits — no matter whether or not those profits were actually distributed to them.

The main reason for being recognized as an S Corporation is for the tax savings.  By allowing the corporation’s profits or losses to pass through to the shareholders, the shareholders avoid double taxation which is an issue with a regular corporation (C Corporation).

One of the best methods of saving taxes for the S Corporation is to reduce FICA or Self Employment Taxes.  For example, if a contractor were paid $100,000 per year, the contractor would have to pay self-employment taxes of about $15,000 per year.  However, if the contractor’s S Corporation were paid $100,000 and the S Corporation paid the contractor a $50,000 salary (this must be considered a fair wage) for services, the contractor would only have to pay FICA (same as self-employment taxes) on his $50,000 wages or about $7500, saving the contractor about $7500 each year in taxes.

However, running a salary through payroll includes extra costs and the addition of unemployment tax.  The rules are that the owners must pay themselves a “realistic” salary and can take the rest in dividends.

Posted in Colorado, Taxes