Are You Ready to be Taxed as an S-Corp?

Always a hot topic in the accounting field, countless meetings between businesses and their accountants entail questions about the S - Corp. Business owners of all sizes hear the words “tax saving” and promptly leap at the opportunity to take advantage of whatever that may be. S - Corps are great under the right circumstances, but they are not for everyone, and you need to be prepared prior to electing to be taxed as one.

The main benefit of the S - Corp arises out of the differential in taxation of business income on the business owners annual tax filing. If a sole proprietor made $100 at the end of the year, that $100 would be taxed similar to payroll in that you pay FICA, Medicare, & Social Security. Then you get hit with income tax as well. Thanks Uncle Sam. Where the S - Corp is beneficial is when you have gains in your business at the end of the year, you only pay ordinary income tax on those gains, effectively foregoing the payroll tax. Sounds great, doesn’t it? A couple of problems: the main one being is that you must have payroll provided by the S - Corp to the owner(s). This payroll has to be deemed “reasonable compensation”. What is reasonable compensation? While we are not attornies, the industry understands this to mean "similar pay for a similar position for a similar sized company". While this can be a moving target during times of business growth, there are ways to come up with a reasonable number so as not to upset the IRS.

Tax savings! While these are great words to hear, and being taxed as an S-Corp can bring them to life, you must be certain that your business is ready for it. Otherwise, you may end up paying more in taxes than what you started at. If you have any questions about S-Corps and the benefits they could provide to your business, contact us here at Magnolia Associates. We look forward to helping you grow your business.