You may have heard the term “S corporation” mentioned in reference to your small business. In case you don’t know what that term means, the IRS defines S corporations as “corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” In layman’s terms, an S corporation is a designation given to a business that alters the way the business and its owners are taxed.
At The Jones CPA Group, we deal with many business owners who are unsure of how to file taxes for their businesses. For most of our clients who own small businesses, we strongly recommend filing to become an S corporation. Doing so can offer you exceptional savings in your taxes.
Many small-business owners operate their businesses as single-member LLCs or partnerships. They are taxed at their standard income tax rate, but on top of that, they must pay a self-employment tax; for 2015, the self-employment tax rate is an additional 15.3%.
Owners of small business with an S corporation designation, on the other hand, are only taxed at their standard income tax rate, waiving the self-employment tax completely. With the self-employment tax continuing to rise, you can imagine how much filing for this designation can save you.
If you receive an S corporation designation for your business, you will be required to pay yourself an “officer’s wage” in order to be compliant with IRS requirements. You must select a reasonable salary for yourself at the beginning of each year, and issue yourself a paycheck as you would for any other employee; you will also issue yourself a W-2 each tax year. The officer’s wage will then be listed as an expense for the business.
It is important that you continue paying yourself an officer’s wage each year in order to remain in compliance with IRS regulations. If you fail to do so and are audited, you can face penalties and fines from the IRS. If you’re unsure of how to pay yourself an officer’s wage, The Jones CPA Group offers payroll services and we are more than willing to help.
Filing as an S corporation is beneficial for the vast majority of small businesses; however, there are many small-business owners that should file under a different designation. If you are interested in your business becoming an S corporation or are unsure whether or not filing as an S corporation is right for you, contact the Jones CPA Group. Our tax professionals will work with you to determine if filing as an S corporation is the best choice for your business.