What is an S-Corporation?

An S-Corporation, commonly referred to as a small business corporation, is a common tax designation that provides significant savings to small business owners. A subchapter S corporation is a status granted by the IRS that allows income, deductions, and credits to flow through to the shareholder’s personal tax return. This means that the S-Corporation itself does not pay income tax, but the shareholder pays income tax based on their personal income tax rates.

The most common benefits of an S-Corporation are:

  • Avoids double taxation that C-Corporations are subject to

  • The profit is not subject to self employment tax

  • Reduced taxable gains when selling the business

This designation is designed for small businesses, therefore there are limitations for what businesses are eligible for this election. S-Corporations are not a business entity type, but a tax designation. The business must first be a C-Corporation or and LLC before making the S-Corporation election.

While the profit from an S-Corporation is not subject to self employment tax, if a shareholders works in the business, they are required to be paid a reasonable compensation through payroll. This ensures that the shareholder is contributing to social security and medicare taxes.

Every scenario is different, therefore this general advice cannot be applied directly to your situation and is not intended to be tax advice. If you have concerns about S-Corporations, it is best practice to consult with a tax professional.