Many small businesses are told they should “create an S-Corp” but are not really told what that means or why they might do that. In reality, there is no such thing as an “S-Corp.” Rather, certain businesses can elect to be taxed as an “S-Corp.”
We’ll explain what that means in this post.
According to the IRS, to qualify for S-Corporation status today an LLC or corporation must:
You can make an S-Corp election when you create your business, or at the beginning of each calendar year. However, you really shouldn’t make this election until each owner of the business is making more than a “reasonable salary” as defined by the IRS. If you are making enough to pay the owners a salary and have profits left over, then it might be a good idea to make the election. Regardless, you should always talk to an accountant before making the election to make sure it makes sense for you.
This is really the biggest benefit to making an S-Corp election.
After making the election, your business must pay yourself a salary. That salary is then subject to all normal taxes, including employment taxes. However, when you distribute excess profits to the owners, those owners will not have to pay employment taxes on those profits. That means they can reduce their tax liability by about 15% on those profits. And that can add up to a big savings.
There’s so much more to learn! Here are a few related guides you should read: