Unravel the complexities of the S Corporation (S Corp) in this informative video.
S Corporations, the letter “S” just stands for the section of the tax code that created it.
The S corporation, though, does not pay taxes to the IRS; you pay the taxes on the profits to the IRS. However, the great thing is that you don’t pay Social Security or Medicare taxes on the profits, unlike a sole proprietor who pays Social Security taxes and Medicare taxes on all
profits. In an S Corp, you don’t do that.
However, the IRS expects you to take a reasonable salary. I have seen numerous new clients when they’ve come to me with S Corps, and their former accountants did not have them take salaries. I will tell you, now the IRS is ramping up to look at that even more with the new budgets.
If you don’t take a salary, you will have a problem. Because if the IRS comes back at you, they’re going to make you take a salary that will be much higher than you want it to be.
So, there are a lot of advantages to having an S Corporation, but it’s not
for everybody. It depends on where you live, the kind of income you earn, and the amount of income you earn.
There are also other complicating factors with the new tax laws that allow you to save money by having an S corporation.
You get to pay what would be state income taxes at the corporate level, you get to deduct them, and you get a credit on your personal return. This is something new that just started in 2021, but it is a significant advantage to people. And that doesn’t work as a sole proprietor; it only works as an S Corporation.
If you want to be an S corporation, you want to have a conversation first about the benefits, the rules, and the best time to do it.
Please contact our office for more information about becoming an S Corporation. We are always happy to help.