Entity Analysis -- The S-Corp Explained

The S-Corp is an entity that passes all income or loss through to the taxpayer.

What this means is the entity, like a partnership, does not pay income tax on the income of the business but rather the owner reports the income on their personal tax return and is responsible for the tax liability.

?A major advantage of the S-Corp is the ability to limit the self-employment tax.

Unlike the partnership and the Single Member LLC, the S-Corp can minimize the self-employment tax of 15.3% to the amount of wages paid to the shareholder.

Some important points about the S-Corp:

? The owner needs to take reasonable compensation on payroll, and can then take additional funds from the entity as an owner distribution, not subject to the self-employment tax.

? Although on the federal level, the income is passed through to the owner, certain states and localities tax the entity such as NYC with a flat income tax rate of 8.85%.

? Shareholder stock basis and debt basis can get tricky with the S-Corp.

In addition to filing a separate business tax return, there is also the additional administrative responsibility to process payroll.

Keep in mind that both cost and take time.

Have a question about this or another tax-related matter? Feel free to reach out!

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