S-Corporation FAQs Back to All FAQs

How does a S Corporation help with taxes?

An S Corporation, also known as an S Corp, is a type of corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. This allows the business to avoid paying federal income tax at the corporate level, and instead, the income, deductions, and credits of the business are "passed through" to the shareholders and are reported on their individual tax returns. The S Corp is considered a pass-through entity, which means that the business itself is not taxed on its income.

Here are some ways in which an S Corp can help with taxes:

1. Avoidance of double taxation: One of the biggest advantages of an S Corp is that it avoids the double taxation that is common in C corporations. In a C Corp, the business pays federal income tax on its profits, and the shareholders are then taxed again on any dividends they receive. In contrast, an S Corp's income is passed through to the shareholders and is only taxed at the individual level.

2. Tax savings for self-employed individuals: S Corps can be particularly beneficial for self-employed individuals who would otherwise have to pay self-employment taxes on their entire net income. With an S Corp, the business income is split between salary and distributions, and only the salary portion is subject to self-employment tax.

3. Deductions and credits: S Corps offer flexibility in terms of deductions and credits that can be claimed on individual tax returns. For example, business expenses such as rent, supplies, and equipment can be deducted from the business income, which can reduce the overall tax liability.

4. Retirement benefits: S Corp shareholders who are also employees of the business may be able to take advantage of retirement benefits such as a 401(k) plan, which can provide significant tax savings.

It is important to note that S Corps have certain restrictions and requirements, such as a limit on the number and type of shareholders and the need to maintain accurate records and file annual tax returns. It is recommended to consult with a qualified tax professional to determine if an S Corp is the best choice for your specific business needs and circumstances.

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