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S Corporation
built 283 days ago
As distributions from an S Corporation are not wages, they are not subject to self-employment tax. However, any salary received by a shareholder as a corporate officer or employee would remain subject to employment taxes. Any officer who performs significant tasks for the corporation will likely be regarded by the IRS as an employee, and the IRS may reallocate distributions made to an undercompensated employee-shareholder as wages, with possible consequent late fees, penalties, and interest.
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An S Corporation (Small Business Corporation) is a business elected for S Corporation Status through the IRS. This status allows the taxation of the company to be similar to a partnership or sole proprietor as opposed to paying taxes based on a corporate tax structure.
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All S Corporations begin as a C Corporation (general or standard corporation) when Articles of Incorporation are filed with the state. If theowners wish to apply for a special tax status allowing company profits or losses to be reported on the shareholders' personal returns, then additional paperwork is required. Form 2553 (Election by a Small Business Corporation), from the IRS, must be signed by all shareholders and submitted within the strict time limits allotted by the federal government to apply for S Corporation status.
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Commonly used by small business proprietors, the S Corporation pays no corporate taxes, but instead passes profits and losses directly to its owners (the stockholders) who declare such profits and losses as part of their personal taxable income. In this manner S Corporations resemble partnerships, although some subtle differences in taxation exist. As a result, S Corporations do not become subject to the "double-taxation" that C Corporations enjoy. However, not all corporations qualify for S Corporation treatment.
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For S Corporations with earnings and profits, that portion of the distribution that does not exceed the accumulated adjustments account (AAA) is treated the same as an S Corporation having no earnings and profits. The remainder is treated as a dividend to the extent it does not exceed the accumulated earnings and profits. Any remaining distribution is treated the same as the S Corporation having no earnings and profits. Sec. 1368. Distributions
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The S Corporation, on the other hand, is not taxed at the company level. Instead, it is taxed based on the distributions to the shareholders at the individual shareholders’ marginal rate. One thing to bear in mind is that this taxation occurs whether or not there is an actual distribution to the shareholders. This means that the income is only taxed once, as a distribution to the share holders.
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S Corporation