Choosing to operate as an S-Corp can provide numerous tax advantages for small business owners. Our experts at Succentrix Business Advisors help clients understand the different aspects of an S-Corp, including these strategies and benefits.
Pay yourself a reasonable salary that reflects the work you do for the business. This helps avoid IRS scrutiny and ensures compliance with tax regulations.
Understand the difference between salary and distributions. While salary is subject to payroll taxes, distributions are not, allowing for potential tax savings.
Maintain meticulous records of all business transactions, including income and expenses. This will support your tax filings and help in case of an audit.
Utilize retirement plans available to S-Corps, such as a 401(k), to reduce taxable income while saving for the future.
Strategic planning can enhance the benefits of your S-Corp status.
An S-Corporation (S-Corp) is a special tax designation that small businesses can elect by filing Form 2553 with the IRS. This designation combines many of the legal protections of a corporation with the tax benefits of a pass-through entity. To qualify, your business must:
The primary distinction of an S-Corp is how it's taxed. S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.
One of the most significant advantages of the S-Corp structure is avoiding the double taxation that C-Corporations face. S corps are generally exempt from federal tax on most earnings, so they can distribute more gains to stockholders. Instead, profits pass through directly to your personal tax return.
Perhaps the most valuable tax advantage for many small business owners is the potential reduction in self-employment taxes. If you're self-employed, you'll usually have to pay higher Social Security and Medicare taxes, collectively known as self-employment taxes, than if you were an employee of a company.
As an S-Corp owner, you can:
This strategy can result in significant tax savings compared to a sole proprietorship or partnership where all income is subject to self-employment taxes.
As a pass-through entity, one of the biggest tax advantages of the S-corp business structure is that it avoids double-taxation, which means S corps don't have to pay taxes at the federal level the way C-corps do. Instead, S-corp profits are only taxed once, on the personal tax returns of individual shareholders.
If your S-Corp experiences losses, these pass through to your personal tax return, potentially offsetting other income and reducing your overall tax liability. This can be particularly beneficial in the early years of business operation when losses are more common.
Finding the optimal balance between salary and distributions is crucial for S-Corp owners. The IRS requires you to pay yourself a "reasonable salary" for the work you perform, but defining "reasonable" can be challenging.
At Succentrix Business Advisors, we can help you determine an appropriate salary based on:
Any compensation above this reasonable salary amount can potentially be taken as distributions, which aren't subject to payroll taxes. This approach can save thousands in self-employment taxes while remaining compliant with IRS requirements.
As an S-Corp owner, you have some flexibility in timing income and expenses to maximize tax advantages:
Our tax professionals can help you develop a customized tax timing strategy that aligns with your business cycle and personal financial needs.
S-Corps offer excellent retirement planning opportunities that can provide immediate tax benefits while building your future financial security:
These retirement vehicles allow for significant tax-deductible contributions, reducing your current tax burden while building retirement wealth.
S-Corps can deduct certain fringe benefits provided to employees, including owner-employees:
By structuring these benefits properly, you can potentially reduce your overall tax burden while providing valuable benefits to yourself and any employees.
The IRS often scrutinizes S-Corp returns, particularly regarding the reasonable salary issue. To protect yourself in case of an audit:
At Succentrix Business Advisors, we emphasize the importance of thorough documentation to support your tax positions and provide protection in case of IRS inquiry.
As your business grows, your optimal entity structure may change. We help our clients regularly evaluate whether an S-Corp remains the best option by considering:
At Succentrix Business Advisors, we provide guidance on selecting the most tax-efficient business structure, whether it's an LLC, S-corp, or C-corp, based on your business goals.
One of the most common mistakes S-Corp owners make is setting an artificially low salary to maximize distributions. The IRS is well aware of this strategy and targets it during audits. If your salary is deemed unreasonably low, the IRS may reclassify some or all of your distributions as wages, resulting in back taxes, penalties, and interest.
S-Corps must file their annual tax returns (Form 1120-S) by the 15th day of the third month after the end of the tax year—typically March 15 for calendar-year businesses. Missing this deadline can result in penalties and increased scrutiny.
S-Corp shareholders must carefully track their stock basis, which affects the tax treatment of distributions and the ability to deduct business losses. Failing to maintain accurate basis records can lead to tax issues when taking distributions or claiming losses.
Certain tax benefits require specific elections on your tax return. Missing these elections can cost you valuable deductions and credits. Our tax professionals ensure you don't miss these opportunities.
Loans between shareholders and S-Corps must be properly documented and have reasonable terms. Improperly structured loans can be reclassified as taxable distributions or wages.
At Succentrix Business Advisors, we believe in going beyond traditional accounting services to help our clients succeed. Our business advisory services include strategic planning, financial analysis, and budgeting to help you make informed decisions and achieve your goals.
Our team of tax professionals can help you:
We take the time to understand your financial situation and tailor our advice to ensure you're making the most of the opportunities available to you. With our expert guidance, you can confidently navigate the tax season and beyond, knowing that you're maximizing your savings.
If you're currently operating as an S-Corp or considering this structure for your business, we invite you to schedule a consultation with our team. During this meeting, we'll:
Don't leave money on the table through inefficient tax planning. Contact Succentrix Business Advisors today at (720) 392-1040 or visit www.succentrixbrighton.com to schedule your S-Corp strategy consultation.
