If you’re like most small-business owners, you’re probably operating your company under the designation of a single-member LLC or partnership—and you’re probably doing it without much thought regarding your other options. But at Biesinger & Kofford CPAs, our Provo business accountants often recommend that business owners register their companies as an S-corporation. Keep reading to learn more about S-corporations and the benefits of registering under this designation. If you have further questions, please reach out to us.
What Are S-Corporations?
An S-corporation is a business that passes its profits and losses, as well as its deductions and credits, on to the shareholders in the company. This causes the company and its shareholders to be taxed differently than single member LLCs or sole-proprietorships. S-corporations fall under the broader designation of “pass-through” entities, because they pass the business’s profits and losses through the shareholders.
How Your Income Differs
For most LLCs and partnerships, the company’s profits are passed on to the partners through form K-1. In S-corporations, however, all officers in the business receive a paycheck, just like any other company employee, and are issued a W-2 every year then any remaining profit/loss are passed on to the owners on a K-1.
You get to set your own salary each year, so you can change the amount you’re paid as your business’s growth changes. However, you must always pay yourself a salary. Failure to do so can result in fines and penalties from the IRS.
How It Saves You Money
So how does this designation save you money? If you’re operating your business as an LLC or partnership, the income you receive from your business is taxed at the standard rate, plus an additional percentage for self-employment taxes. In 2017, self-employment tax was 15.3%.
But with an S-corporation, you are only taxed at the standard income tax rate. That’s 15.3% more money in your pocket every year. And with the self-employment tax expected to steadily rise, you can imagine just how much money this can save you.
While registering as an S-corporation is a wise decision for most business owners, it’s not right for everyone. If you want to learn more about the S-corp designation, or you need help deciding if this is the right choice for you, please contact one of our Provo business accountants. We can help you make the decision that will best suit you and your company.