Top 10 Questions about S Corps

During tax season, we field a lot of questions from clients about S Corporations (S Corps). Here are the 10 most common questions and our answers:

1. What is an S Corp and how does it work?

An S Corp is a tax designation that allows a corporation or LLC to pass income, losses, deductions, and credits through to shareholders to avoid double taxation.

2. How is an S Corp different from an LLC?

• LLC: More flexibility, no strict payroll requirements, but subject to self-employment tax on all income.
• S Corp: Avoids double taxation typical of a C Corp while requiring shareholders to take a salary.
  
  

3. What are the benefits of electing S Corp status?

• Avoids double taxation (profits flow through to shareholders).
• Allows self-employment tax savings by splitting income into salary and distributions.
• Provides liability protection for owners.
• Easier to transfer ownership than an LLC.
  
  

4. How does an S Corp help reduce self-employment taxes?

Owners pay payroll taxes only on their “reasonable salary.” The remaining profits (distributions) are not subject to self-employment taxes like an LLC’s income is.

5. What is a reasonable salary for an S Corp owner?

The IRS requires owners to take a “reasonable salary” before distributions. A reasonable salary depends on:

• Industry standards
• Business profits
• Job responsibilities

Failure to pay a reasonable salary may trigger IRS audits. We recommend that you consult with your accountant for advice on your specific situation.

6. How are S Corp distributions taxed?

• Salary: Subject to payroll taxes (Social Security & Medicare).
• Distributions: Taxed at the shareholder’s personal income tax rate but not subject to self-employment tax.
  
  

7. Do S Corps pay corporate taxes?

No, S Corps do not pay federal corporate income tax. Profits and losses pass through to shareholders, who report them on personal tax returns. However, some states impose their own S Corp taxes (e.g., California’s $800 minimum franchise tax).

8. Can an LLC elect S Corp taxation?

Yes, an LLC can elect to be taxed as an S Corp by filing Form 2553. The business structure remains an LLC, but it gets the tax benefits of an S Corp.

9. Who can and cannot own an S Corp?

S Corp ownership is restricted to:

✅ U.S. citizens or resident individuals

✅ Certain trusts and estates

🚫 No non-resident aliens, partnerships, corporations, or most LLCs can own shares in an S Corp.

10. How do I form an S Corp?

• Register a corporation or LLC in your state.
• File IRS Form 2553 within 75 days of formation or by March 15 for an existing business.
• Follow payroll and tax rules to maintain compliance.
  
  

Need Help?

📞 Call us at (703) 672-1225

📧 Email us at payroll@paysteady.com