McVay Business Services - Accounting & Tax Services Pensacola, FL
There is a misconception floating around out there that an S-Corp is a standalone entity. Not true. There are three basic business entities with variations within. The three basic are-
Also note how an S corporation is not listed. It is not an entity. It is a taxation election. The underlying entity has to be one of the above, and usually it is an LLC (either single-member or multi-member) for the ease of formation. So while we might talk about your ‘S Corp’, or ‘S Corp Taxes’, we are truly talking about your underlying entity being treated as an S-Corp for taxation. Again, this is a common misconception… no biggie if you thought otherwise. Avoid Self-Employment TaxesA common complaint from those who own their own business is self-employment tax. Can you avoid, reduce, eliminate or lower your self employment taxes or SE taxes? Yes, to a large extent actually but it takes some effort and an S Corp Election. If you own a business as a garden variety single-member LLC (one owner or shareholder), your business income will be reported on your personal tax return under Schedule C and is subject to self-employment tax (currently 15.3%) and ordinary income tax. The same is true for a business that has not formed a corporation such as a sole proprietor and partnerships. So, you could easily pay an average of 40% (15.3% in SE taxes + 25% in income taxes) on all your net business income in Federal taxes. Wow! S Corp ElectionIf you own an LLC and have elected to be treated as an S corporation (Subchapter S) for taxation, the business now files a corporate tax return on Form 1120S. What’s the big deal? Before we get into that, let’s look at some quick numbers. These are based on using a salary of 40% of net business income for incomes up to $500,000 and then decreased incrementally to 30% for the millionaire at $2,500,000. Mike McVay - Accountant
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Mike McVay, Tax Accountant Blog
Certified QuickBooks ProAdvisor & Licensed Tax Accountant Pensacola, FL Best Price
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