What exactly is an S Corp and how it can save you money

What Exactly is an S Corp?

Let us start with the basics. An S Corp is not a business structure like an LLC; it is a special tax designation that businesses can elect that allows for some sweet tax benefits!

Here is a quick comparison:

LLC (Limited Liability Company):

A legal entity regulated by state laws

Shields your personal assets from business liabilities.

S Corp (S Corporation):

A tax status regulated by the IRS

Determines how your business earnings are taxed, potentially saving you money.

Lets you act as both the employer and the employee, unlocking unique tax deductions and benefits

By forming an LLC and then electing S Corp tax status, you get the best of both worlds: strong legal protection and some significant tax advantages.

Requirements to become an S Corp

To elect S Corp status, your business must meet several IRS criteria, including being a domestic corporation with eligible shareholders, having no more than100 shareholders, issuing only one class of stock, and engaging in permissible business activities. You must also file the necessary forms within the specified timeframe and ensure that owner-employees receive reasonable compensation.

If you meet these requirements, electing S Corp status can offer substantial tax benefits and legal protections for your business.

Top 5 Benefits of an S Corp

1.      Save on Self-employment Taxes

One of the biggest perks of an S Corp is saving money on self-employment taxes:

Salary and Distributions: You can split your income into a reasonable salary and distributions. You only pay Social Security and Medicare taxes (FICA taxes) on the salary portion, not the distributions.

Example: If your business makes $100,000, and you take a $40,000 salary, you will only pay self-employment taxes ~15.3% FICA taxes on the $40,000 salary. The remaining $60,000 taken as distributions avoids these taxes, saving you money. In this example that is a tax savings of$9,180! Wow!

2.      Other Tax-Deductible Benefits

S Corps can offer certain benefits that save you money on taxes:

Health Insurance Premiums: You can deduct health insurance premiums for yourself and your family as a business expense, reducing your taxable income.

Retirement Plans: You can contribute to retirement plans, like a Solo 401(k), as both the employer and employee. This maximizes your retirement savings and provides tax benefits.

Other Benefits: S Corp owners can also enjoy other perks like disability insurance, which can be deducted as a business expense.

3.      Avoids Double Taxation

S Corps help you avoid paying taxes on the same income:

Pass-Through Entity: Unlike C Corps, which pay corporate income tax and then shareholders pay taxes in dividends, S Corps pass profits and losses directly to shareholders. This means business income is only taxed once at your personal income tax rate.

Simplicity: This pass-through mechanism simplifies the tax process and ensures that earnings are taxed at personal income tax rates.

4.      Limited Liability Protection

Operating as an S Corp protects your personal assets:

Personal Asset Protection: Your personal assets (like your home and savings) are protected from your business debts and lawsuits. If your business incurs debt or is sued, your personal assets are generally safe.

Peace of Mind: This protection helps minimize your personal risk while running your business

5.      Business Credibility and Longevity

Forming an S Corp can boost your business’s reputation and ensure it lasts:

Credibility: An S Corp structure can make your business look more credible, helping you attract investors, secure loans and form partnerships

Perpetual Existence: Unlike sole proprietorships, which end if the owner dies or leaves, an S Corp continues to exist. This ensures your business can keep going even if you step away.

Next Steps 

Now that you understand the benefits of an S Corp, and the savings it could create for you, consider making the switch to leverage these tax advantages.

Need help or advice on setting up your S Corp? Reach out to us! We are here to guide you through the process and help you maximize your savings!

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