Lessens the Self-employment Tax Burden on LLC Members: Only income paid to S-Corp owners on the payroll are subject to self-employment taxes. Profits paid as distributions are not subject to Social Security and Medicare taxes so owners may find that the S Corporation election lowers personal tax burden.
Enables C Corporations to Avoid Double Taxation: As an S Corporation, a corporation’s profits and losses flow through to shareholders’ personal tax returns and are taxes at the individual tax rates. The corporate entity does not pay income tax. Shareholders that are employees of the C Corporation only pay self-employment tax on the wages or salary that the Corporation pays them. Dividend income paid to shareholders is not subject to self-employment tax; those monies are taxed as either ordinary income or qualified dividends.
May limit Growth Potential
S Corps may not have more than 100 shareholders, so growth potential may be limiting.
Reasonable Compensation issue can be a roadblock.
S Corporations not treated equally at the state level.
Paul Mocker, CPA
6599 Camino Venturoso
Goleta, CA 93117
(206) 328-6794 Tel
(805) 856-1567 Fax
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