Converting your business into an S corporation carries many benefits.
One of the greatest benefits of its new entity is S corp tax deductions. Executed the right way, and these deductions can save you a great deal of money every year.
So… what’s an S corp, its taxes, deductions, and why should you care?
Keep reading, and we’ve got a full breakdown of S corp taxes and its benefits.
Plus, helpful insights, whether converting to an S corp, is genuinely for you. Let’s do this!
What is an S Corporation?
An S Corporation is a flow-through entity.
The S Corp has owners and shareholders akin to typical corporations.
And, like corporations and LLCs, its owners gain the benefit of limited liability.
The owners also aren’t taxed twice when processed on a corporate and personal level.
The S Corp concept is like this:
- The business owner(s) incorporate
- Shareholders submit the 2553 Form
- If qualified, the S corp gets formed
The income generated by the corporation is now passed to its owners.
Because of this, the income earned gets taxed at a personal level. The corporation isn’t subject to corporate tax since it flows-through to its owners.
An S Corporation is a standard solution for the self-employed. It’s also an option to protect one’s operation and make it easier to exit/transfer ownership.
These entities are an ideal alternative to something like an LLC.
Tax Time: How are S Corps Taxed?
S Corporation taxes, as noted above, are done so at a personal level.
You are typically filing two forms:
The 1120S is the official financial record filed to the IRS. The K-1s are submitted by each shareholder and detail income and share value.
Note: Please be aware that S Corp taxes must get filed by March 15!
The shareholders of the S Corp tend to get paid through salaries.
The salaries are “reasonable” in the eyes of the IRS, so nothing fishy is going on.
This is structured this way to reduce the self-employment tax on business profits.
It goes something like this around tax time:
- Shareholders are expected to pay self-employment FICA taxes
- Everyone does their write-offs, files, and pays taxes
- Leftover profits aren’t subject to self-employment taxes
Now, each shareholder contributes to the S Corps’ bottom line.
This means, depending on the noted share value held, taxes will vary per person.
It’s often why you’ll see S Corps done by the self-employed, to keep things simple.
The taxation rules apply to each shareholder if there is more than one. Each will handle their taxes accordingly, based on salary and business income.
What else will the S Corp file during tax time? Well:
- Form 940 — This is your unemployment taxes paid to qualified employees, due by January 31 or extended to February 10
- Form 941 — This is your quarterly income taxes for Social Security and Medicare paid to employees (if you have them). It’s submitted on January 31, April 30, July 31, and October 31.
Are you confused about these two forms? We have a handy guide explaining them.
Your S Corp can face penalties if taxes get filed late (as expected). This is a monthly charge but scales based on the number of shareholders. The penalties also have a percentage-based penalty on balance.
All-in-all: You may want to consider hiring a tax attorney when setting up your S Corp. They offer expert guidance and insights to do it correctly. And, they can answer your specific questions about what it brings to your business.
S Corp Tax Deductions: What Can I Write Off?
An S Corp has several tax benefits compared to other entities. Yet, these benefits are null if your business fails to generate enough income. Before you know it, you could pay as much taxes as you would have when filing as self-employed.
Here is where the true benefit of the S Corp comes in:
- Each shareholder can write off deductions for their own incomes
- The IRS tends to be far more flexible with S Corp deductions
Your S Corp isn’t some fly-by-night type of operations in the eyes of the IRS. So, you get plenty of opportunities to deduct expenses.
- Renting Your Home — You can technically rent your home to the S Corp for up to 14 days. The rental must be for business purposes and set to reasonable rates. A 1099 form gets submitted and gets included in the expenses.
- Vehicle Deductions and Depreciation — As long as you’re great at logging miles, you can include vehicles in the deductions. Likewise, you could write off the vehicle’s depreciation through its lifetime.
- Health Insurance and Medicare — Let the S Corp pay health insurance deductibles, or have it reimburse the shareholder. You could do this for family members, too, if you hire them. And, even deduct Medical Expense Reimbursement Plans (MERPS).
- Losses — As expected, losses are deductible with the S Corp. The deductible is distributed among the number of shareholders.
There are a bunch of other deductions you could explore, too. You could also consider moving to a tax-friendly state for your operations. Be mindful of your finances, track everything, and you should see the many benefits of an S Corp.
Let STG Handle Your Business Tax Needs
Do you feel like you’re taking full advantage of S Corp tax deductions? Are you having trouble with business taxes in general?
The tax pros of Silver Tax Group offers extensive tax services for all your business needs. STG is here to help with complicated tax codes.
Work with our tax experts and schedule your consultation today!