Tax Savings with an S-Corporation

S-Corporations are one of the most common business types in the United States, they have many advantages, including tax benefits. S Corporations reduce employment taxes, because they allow owners to avoid Social Security, Medicare or self- employment taxes on some of the business income. This can be done because S-Corps have the ability to pay out its earnings through dividend payouts to its owner and by doing so avoids paying the FICA Tax which is 15.3%. In order to do this the owner must run a reasonable amount of compensation.

In order to demonstrate this, say you have a business that has a profit of $100,000 a year. If this business is partnership or sole proprietorship you would have to pay the 15.3% FICA tax on the $100,000., which would be around $15,095.00.

If you have an S-Corporation you can divide your business profits into two groups, shareholder wages and distributive share. The shareholder wages are only subjected to the FICA tax. Since S-Corps are required to take a reasonable amount of compensation, if you made $100,000. And let's say you took $40,000 for your salary, which is taxed by the 15.3%, so you would pay around $6,000 in Social Security and Medicare taxes. The remaining amount of $60,000 or the distributive share is not subject to the FICA tax, this amount can be paid out through dividend payments. In this example you would save around $9,000.

Another advantage having an S-Corp is that if it takes a loss, that loss may be able to be deducted on the shareholder's individual tax return,, which could save you roughly anywhere from a couple hundred to a couple thousand dollars. S-Corporations tend to have a lower risk of being audited, which can lead the owners to make more legitimate deductions. S-Corporations also do not pay a corporation tax.

S-Corporations have many advantages and can save business owners on taxes. For more details please see our Tax & Entity Comparison, it includes Charts on different business entities along with tax examples.