I disagree with the statement about the IRS not caring if you pay out salaries. I can assure you they care. We have a lot of personal service clients (mostly doctors) 
. It’s actually a high audit area for our client base. BUT that being said, we tend to the conservative side. Most of them pull at minimum $230k salary for full retirement benefits (They can then put $46k into profit sharing/401k, tax-free). I have heard some pretty lenient formulas, like $30k salary would suffice even for some of our clients. But I would never recommend a profitable S Corp. take no salary unless they want IRS knocking on their door.
tax at the federal level, on S corps! Some states do tax, but it is pennies. California is a whopping 1.5%.
I’m not sure that is entirely accurate… An S-corp does not pay taxes like a C-Corp does. S-corp earnings (whether distributed to shareholders or not) are included on the shareholders taxes. There is an informational filing given to shareholders (K1) but that is it.
Shareholder meetings take me all of 30 seconds. I have a template, and once a year I change the date, print it out and sign it.
For each $1000 more I take as distributions instead of salary, I save $145. On $40,000 that would be close to $6K less in taxes I pay.
Even if you take NO distributions, you WILL still pay the tax on the company profits
It is WELL worth it to form an S-corp if the business is profitable. Otherwise, you are just giving away 14.5% of your income that you don’t have to.
Jacob, Justin- Lawyers can usually get around the corp/LLC to the owner because of co-mingled assets. The more formal you keep the business and your personal stuff, the better protected you’ll be. Don’t go buying stuff for yourself personally with the business money, don’t loan money to the business without paperwork, etc.
Boo – You’ll have to fill out a Schedule C for 2008. This is just a schedule on your personal tax return just like itemizing your deductions. If you’re dealing with a good amount money, you will probably want to see a professional to learn the ropes. Then you can decide if you want to do it on your own. You also really need to file a DBA with the state. You should probably just go ahead and get an LLC.
Steve – Sorry, but you’re wrong on that. All income flows through to shareholders and is taxed at the individual level, as Maury said.
I think it’s also important to note that the S-Corp doesn’t make a lick of difference in courts (excluding tax court). S status is known as a “check the box election.” Only the IRS really cares.
BTW – to Steve – there is no corp
1) Doesn’t Corporate tax need to be paid by the S-Corp? 2) You will have to pay additional tax on your 1040 for the salary portion 3) Any additional distributions (ie. dividends) back to you for earnings in excess of your salary will be taxed?
1) was covered and recovered 2) Yes. 3) Yes, but you don’t pay fica on this amount. That’s where the savings comes into play.
Not correct. You never pay tax on distributions!! You pay tax on the profits. Hence the “Pass-through” taxation on LLCs and Scorps.
I’m new at this, so please correct me if I’m wrong. This incorporated advantage only applies to those who own their own business, or is able to work as an independent contractor for a company and go through 1099 status right? If the company is only willing to hire you as their employee and only issue a W2, then this is not possible. Much thanks.