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S-Corps save Business Owners Money!

Posted on: April 20th, 2016 by Ken Smith



S-Corps Save Business Owners Money!

The primary benefit of an S corporation is that an S corporation minimizes employment taxes. An S corporation election allows a business owner to avoid Social Security, Medicare or self-employment taxes on a portion of the business profits.

I’ll illustrate how this works in a simple example: Suppose your small business makes 100,000 in profit.

You pay Federal and State income taxes on this profit. You would owe the IRS on average about $10,000 on this profit.  If you live in a state with an income tax you probably pay an average of $5,000 in tax to your state government.

You have other taxes on earned income as well. If you operate your business as a sole proprietorship or partnership, you pay roughly 15.3% in self-employment taxes on your $100,000 of profit. So add roughly a 15% tax on the $100,000.

If you operate your business as a regular corporation and you extract the $100,000 as shareholder-wages, the tax law calls these taxes “Social Security” and “Medicare” and you also pay roughly a 15% tax on the $100,000.

Here’s how the Subchapter S election saves you money. An S corporation splits your business profits into two categories: “shareholder wages” and “distributive share.” Only the shareholder wages get subjected to the 15.3% tax. The distributive share is not subject to 15.3% tax.

For example, suppose you split your $100,000 of business profit into $40,000 of shareholder wages and then the balance of the profit is defined as a distributive share.

This way, only the $40,000 of wages is subject to the 15.3% tax. That means roughly $6,000 Social Security and Medicare tax expense.

But the remaining $60,000 of business profit — the non-wages called distributive share — is not subject to the 15.3% tax. That means you’re saving about $9,000 in self-employment taxes compared to a sole proprietor or partner. Similarly, you’re saving about $9,000 as compared to the owner that operates his or her business as a corporation and extracts all the business profit as wages.

This ability to avoid some Social Security and Medicare taxes or self-employment taxes is the big benefit of an S corporation.

To schedule an appointment to implement this strategy and others within the context of your unique tax situation, Contact Brown CPA Group, Ltd., at (847) 509-4100.

About the author: Ken Smith is an Enrolled Agent and Senior Staff Accountant with Brown CPA Group, Ltd.  We know that success means different things to different people. While a business owner strives to maximize profits, increase efficiency and plan for succession; an individual client is more concerned with tax planning, wealth management, retirement and estate planning. At Brown CPA, we work with you on the total picture. Together, we succeed.

Contact your BCPA Tax Professional for help. We’d love to hear from you.

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