Cut Employment Taxes with S-Corps

TLDR: Slash employment taxes with S-corps

Got a Schedule C of your Form 1040?

Have you noticed that the self-employment tax significantly drains your cash? The S corporation may plug a good chunk of that leak because only the W-2 wages that the S corporation pays to you would suffer federal employment taxes.

Here’s the big picture: The S corporation

• deducts the W-2 wages;

• passes the remaining taxable income to you—the shareholder who reports the income on his Form 1040; and

• makes cash distributions to you—the shareholder.

The passed-through S corporation taxable income increases the tax basis of your stock; therefore, distributions of corporate cash flow are usually federal-income-tax-free.

This tax regime places S corporations in a potentially more favorable position than equivalent businesses conducted as sole proprietorships, single-member LLCs that are treated as sole proprietorships for federal tax purposes, partnerships, and multi-member LLCs that are treated as partnerships for federal tax purposes.

That’s because S corporations can follow the tax-smart strategy of paying modest salaries to shareholder-employees while distributing most or all of the remaining corporate cash flow to them in the form of federal-employment-tax-free distributions.

If you would like to examine the potential tax savings available to you with a switch to the S corporation, please give me a call.

Drop us a message and see how we can help you!

“We leverage leading practices and disruptive technology to do more than just balance the books. We're actually building the business. And that's our edge.”
Robert L Whittley CPA
CEO & Founder

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