LYCOS RETRIEVER 
S Corporation: Income
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According to the IRS's Spring 2004 Statistics of Income Bulletin, S corporations continue to be the most popular corporate entity choice, representing 58.2 percent of all corporate entities. For the 2001 tax year, nearly three million S corporation returns were filed, up over 4.4 percent from the previous year. The number of shareholders in S corporations has ... increased by 3.1 percent to nearly 5.4 million.
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An S corporation allows you to avoid two-tiered taxation — that is, paying corporate taxes and then paying personal taxes on the same income. An S corp pays no federal taxes. Earnings — and losses — are passed through to the owner. And because income is taxed to the owner, you can avoid problems arising from the corporate alternative minimum tax. An S corporation must... still file a tax return, and some states impose taxes.
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Having S corporation status can prove a huge benefit for a corporation. The corporation can pass income directly to shareholders and avoid the double taxation that is inherent with the dividends of public companies, while still enjoying the advantages of the corporate structure. In order to qualify, a corporation must be a small business corporation. This means the following requirements must be met:
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In an S corporation, only the salary paid to the employee-owner is subject to employment tax. The remaining income that is paid as a distribution is not subject to employment tax under IRS rules. Therefore, there is the potential to realize substantial employment tax savings. Case in point:
An S corporation differs from a regular corporation in that it is not a separate taxable entity under the Internal Revenue Code. This means that the S corporation does not pay taxes on its net income. The net profits or losses of the corporation pass through to its owners.
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If Acme Corporation is a regular corporation, called a C corporation for tax purposes, it would typically first pay a state corporate income tax on its profits. Different states charge different corporate tax rates, but a good guess might be that the state in which Acme does business will levy a 5% state corporate income tax, or $10,000. A 5% tax on $200,000 equals $10,000.
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