Should You Start an S Corp?

Should You Start an S Corp?

by Rhonda Anderson

Similar to sole proprietors and partnerships, S Corps are pass-through entities. All business income is passed through to the owner. Unlike sole proprietors, LLCs and partnerships, however, the income passed through from an S Corp is not subject to self-employment tax, which amounts to 15.3%. The owner only pays income tax on their business’s income.

S Corps are required to pay their owners a reasonable compensation through payroll. Your business will pay FICA payroll taxes, 7.65% and you personally will have FICA taxes, 7.65%, withdrawn from your paycheck. Your wages are now a tax deduction for your business and whatever profit your business makes is not subject to corporate taxation or self-employment tax. This is where S Corps are advantageous. One of the primary reasons business owners form S Corps is the tax savings potential. Experts recommend if your business net profit is more than $60k, then an S Corp would be beneficial to you.

Health insurance premiums paid on behalf of greater than 2% shareholders are deductible by the S Corp and reportable as wages on the shareholder’s Form W-2, subject to withholding. These premiums are not subject to FICA or FUTA if premiums are made on behalf of an employee under a plan that makes provision for all or a class of employees. A 2% shareholder is eligible for an above-the-line deduction in
arriving at AGI (Adjusted Gross Income) for amounts paid during the year for medical premiums.

Additionally, earnings distributed to shareholders as dividends are taxed at a lower rate than income.

Other considerations:
S Corps cannot have more than 100 shareholders, but an LLC can have unlimited members.
S Corps cannot have non-U.S. citizens as members.
LLCs are allowed subsidiaries without restriction, while S Corps aren’t allowed subsidiaries.
LLCs cannot issue stock, while S Corps can, though only one class of stock.

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