Tampa Business Attorneys address how to save taxes by electing S ...

? ? ? ? ? ?Both Corporations (Subchapter C Corporations) and Limited Liability Companies (LLC?s) can choose to be taxed as an S Corporation pursuant to Section 1362(a) of the Internal Revenue Code. There is actually no entity called a S Corporation, an S Corporation is just an entity choosing to be taxed under the Subsection S, which allows for pass-through taxation. It?s called an ?S Election? because this section of the code is found in Subchapter ?S? of Chapter 1 Title 26(A). ?Owner Employees can save on self-employment taxes by filing for S Corporation status, but you have to make sure to follow some guidelines.

S Corporation employee-owners have two methods of compensation: distribution and salary. The main difference between the two is that salary compensation is subject to payroll taxes (FICA), whereas, distributions are not.? In essence, employee-owners should pay themselves a ?reasonable? salary and can also take distributions of profit of the company based on your Operating Agreement, Shareholder Agreement or other Corporate Documents

Employees must earn a ?reasonable? salary before any distributions are paid.? Current law states that the employee and employer are required to each pay the IRS 7.65% of his or her wages, Social Security (6.2%) and Medicare (1.45%). A W-2 is issued to the employee and he or she must include the wages on his or her federal income tax return.

When a distribution is paid, the amount must be included in the shareholders? taxable income; however, they are not subject to FICA tax.? A W-2 is not needed on this income since there are not any FICA tax requirements.

Many corporations prefer salary compensation to distribution because self-employment taxes are only paid on earned income. Once a ?reasonable? salary is paid to the employee, the remaining profit can be distributed within the corporation as dividends, or unearned income. You are essentially saving self-employment taxes on the profits that are not distributed as salary. The only real problem with this is that the IRS does not provide clear insight on what is considered a ?reasonable? salary.? While there is no formal guideline for? each profession as to what is or what is not a ?reasonable? salary, some insight is provide through common sense, websites such as www.salary.com, and caselaw.

You have every right to structure your business the best way to minimize taxes. There are many other advantages and disadvantages of S Corporations as well as other forms of business organizations. You should always consult with a Tax Professional to discuss what is best for your corporation.

This post was created with the assistance of Legal Assistant Jenny Tragesser

Tagged as: c corporation, employment taxes, fica, limited liability company, llc, s corporation, s election, section 1362, self employment taxes, tax planning

Source: http://www.piklawgroup.com/tampa-business-attorneys-address-how-to-save-taxes-by-electing-s-election-status/

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