OCA’s Guide to keep more of your hard-earned cash through S Corp tax savings

Running your own business is hard work, so why pay taxes more than you have to? If you're a small business owner, electing S Corporation (S Corp) status could be your best tool for cutting down on taxes. Let’s dive into how this works and why it might be just what you need!

What’s an S Corp, Anyway?

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

Source: S corporations | Internal Revenue Service (irs.gov)

Think of an S Corp as the best of both worlds: the protection of a corporation with the tax perks of a sole proprietorship. It avoids “double taxation” that C corps deal with since it is not being taxed on a corporate level and reduces self-employment taxes that a Sole Proprietor pays.

How Does an S Corp Save You Money?

• Pass-through status: In an S corp, business income, deductions, credits, and losses are passed through to shareholders, and are not taxed at the corporate level.
• Employee income advantage: S corp owners must pay themselves a reasonable “salary,” and other shareholders can also be employees. As “employees,” business owners only have to pay taxes on their salary, not on the total income of the business.
• Loss deductions: S corps that incur a loss can pass the loss on to shareholders on a pro rata basis, and those losses can be deducted from other income on a shareholder’s tax returns.
• Self-employment tax relief: S corps that pay out taxable income (as salaries) do not have to pay the 15.3% Federal Insurance Contributions Act (FICA) taxes for Medicare and Social Security, also known as “self-employment taxes”. Rather, FICA is only applied to the salary amount. Contributions to a shareholder/employee’s retirement plan are also tax exempt.
• Healthcare insurance: Healthcare premiums can be expensed as wages and are therefore deductible, which exempts them from FICA taxes. Therefore, business owners can save on taxes by having the S corp pay for their healthcare coverage.

Source: How are S corps taxed? Tips for filing and reducing taxes (thomsonreuters.com)

Here’s the exciting part: as an S Corp owner, you can save big on self-employment taxes. Normally, you’d pay these taxes on your entire profit. But with an S Corp, you only pay them on the salary you give yourself. The rest? It’s treated as dividends, which aren’t hit with self-employment tax. Additionally, unlike C Corps, you will not be subject to “double taxation” since you are not being taxed on a corporate level and will only be taxed on your personal tax return.

That means more money for you to reinvest in your business or treating yourself on a vacation!

To see how much you could save, use the OCA Payroll Tax Savings Calculator

Is an S Corp Right for You?

Although S Corp sounds like a heaven-sent solution, it does not come without its caveats. They come with additional responsibilities and complexities. It includes more paperwork and stricter IRS regulations, like paying yourself a “reasonable salary”.

That’s where the all-star team at OnChain Accounting comes in! If your business is making a substantial profit, the tax savings might be worth the extra effort. OnChain Accounting can provide expert guidance to ensure that you’re fully compliant with all regulations, maximizing your tax savings while avoiding potential difficulties.