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How to Save Taxes with an S Corporation

Ever wondered why so many small third form of tax savings because S
businesses-more than 3,000,000 at last corporations don't pay corporate income
count-operate as an S corporation? taxes. This means that S corporations
Simple. An S corporation saves business avoid the often-talked about
owners big taxes in three separate "double-taxation" problem. However, the
ways:First, as compared to regular "no corporate income taxes" benefit often
corporations (sometimes called C isn't a savings for small corporations
corporations), S corporation owners can and their owners.But let me explain.
use the business's losses incurred during Suppose that two corporations each earn
the early lean years on the owner's the same pretax profit of $100,000 and
personal returns as deductions. For are owned by Ms. DaVinci who pays the
example, suppose a new S corporation highest federal income tax rate of 35%.
suffers a $20,000 loss its first year and One corporation is an S corporation and
that the corporation is equally owned by the other is a C corporation. The S
two shareholder-employees, Smith and corporation can distribute the entire
Jones. Smith and Jones each get a $10,000 $100,000 in profits to DaVinci as
business deduction on their individual dividends because there is no corporate
tax returns because of the S corporation income tax. DaVinci then pays $35,000 in
loss. This $10,000 deduction might save personal income taxes on the S
them each as much as $4,000 in federal corporation profits, which means she nets
and state income taxes.A second, big S $65,000 in after-tax profits from the S
corporation benefit: As compared to corporation. In comparison, the C
almost every other business form, S corporation can't pay the entire $100,000
corporations can save their owners in profits to DaVinci. The C corporation
self-employment or Social Security first pays $22,250 in corporate income
Medicare taxes. Suppose, for example, taxes. When the C corporation pays the
that Adams, Brown and Cole independently remaining $77,750 to DaVinci as a
each own businesses that make $90,000 a dividend, DaVinci pays another $11,663 in
year in profits. Each business owner may 15% "dividend" taxes on the C corporation
pay $13,000 in income taxes. But, profits. This means that DaVinci nets
unfortunately, that's not the only tax roughly $66,000 in after-tax profits from
they pay. Each owner also pays the C corporation profits. In this case,
self-employment or Social Security DaVinci saves money with a C corporation
Medicare taxes.For example, Adams in spite of having to pay the corporate
operates his business as an LLC and income tax.How to Get S Corporation
therefore pays 15.3%, or roughly $13,500, BenefitsTo create an S corporation and
in self-employment taxes on his receive S corporation tax savings, you
profits.Brown operates his business as a need to do two things: First, you must
C corporation which pays all of its incorporate the business either as a
profits to him as a salary. Accordingly, regular corporation or as a limited
Brown (through his corporation) also pays liability company. Second, you need to
15.3%, or roughly $13,500, in Social make an election with the IRS to have the
Security and Medicare taxes.Cole's corporation or LLC treated as an S
situation is different. Cole operates his corporation. The S election is made with
business as an S corporation which means form 2553, available from the web site.
that Cole can split his $90,000 of Note that some states (such as New York)
profits into two payment amounts: salary require a separate state S election.A
and S corporation distributions. Suppose final tip: S corporations can save you
that Cole says only $40,000 of his thousands of dollars annually, but your
profits are salary and takes the other tax savings can't start until you elect S
$50,000 as a "dividend" distrbution. In corporation status. If you're interested
this case, Carter pays the 15.3% Social is electing S status to save on taxes for
Security/Medicare tax only on the $40,000 next year, you may want to call your tax
in salary. Carter therefore pays roughly advisor or attorney right now!Redmond WA
$6,000 in Social Security/Medicare CPA Stephen L. Nelson is the author of
taxes-and annually saves $7,000 in taxes QuickBooks for Dummies and more than 100
as compared to Adams or Brown.S other books as well.
corporations also, sometimes, provide a




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