S Corporation Tax Calculator

As a business owner, you need to determine how to formally structure your business for tax and legal purposes. Many entrepreneurs choose to incorporate as sole proprietors since it is an easy business structure to form and operate. However, a sole proprietor is required by law to report all income on personal income tax returns. This means paying the entire amount for the following:

• Tax on all profits of the business. Essentially, you pay both personal and business tax on your income.
• Self-employment tax, which covers your Social Security and Medicare obligations. If you were an employee of a business, half these expenses would be matched by your employer. Self-employment tax is a sole proprietor's full responsibility.

What's an S Corporation?

An S Corp is an entity that opts to be taxed under the provisions of Chapter 1, Subchapter S of the U.S. Internal Revenue Code.

S Corporations elect to "pass through" income, deductions, credits, and losses to the owners of the business. This makes owners responsible for reporting taxable activity of the company on their personal income tax returns and allows the S Corp to avoid double taxation. Owners are also treated as employees and may draw a reasonable salary from the profits of the business. Only these wages may be subject to self-employment taxes.

Why Choose an S Corp?

Like other business formations, including limited liability companies (LLCs), S Corporations offer business owners limited liability protection. This creates a separation between personal and professional assets to ensure personal assets, like houses and cars, are not impacted by unforeseen circumstances that negatively impact the business, like business debt and lawsuits.

S Corporations are also a popular entity formation choice for small businesses or freelancers with profits between $80,000 and $100,000. By opting for an S Corp election, the company (and/or freelancer) avoids paying federal and state income taxes - legally avoiding double taxation.

Start Using MyCorporation's S Corporation Tax Savings Calculator

Let's start significantly lowering your tax bill now. Use this S Corp corporate tax rate calculator to get started and uncover the tax savings you'll receive as an S Corporation.

Enter your estimated annual business net income and the reasonable salary you will pay yourself as an S Corporation employee to begin. Not sure what your reasonable salary is? Take a look at how much the average salary for this position is through platforms like Glassdoor. This offers you an estimate for your business net income for the year to use in our S Corp tax savings calculator.

How S Corporations Help Save Money

• Pass-through taxes. Your corporation may legally avoid double taxation on the business and its shareholders due to the pass-through election associated with an S Corp.
• Writing off your salary. Owners of an S Corp may draw a salary from the business profits since they are treated as employees. Taxes are then taken directly out of your paycheck, with your S Corp paying for half of your FICA payroll taxes throughout the year. Writing off your salary helps lower your portion of payroll taxes. The automatic deduction from your paycheck ensures you don't have to worry about having enough money for these payments later on.
• Reduced self-employment tax liabilities. Any remaining business profits are distributed to owners as dividends. Dividends are taxed at a lower rate than income. This may potentially reduce your total annual tax liability.
• Simplified ownership transfers. In the event that you decide to sell an S Corp, you may sell as the entity without incurring new tax liabilities.

Remember, however, that in order to elect S Corporation status your business must follow certain eligibility requirements. The corporation needs to have less than 100 shareholders and only issue one class of stock. The business must also designate a registered agent service and incorporate prior to filing for S Corp status. If you are incorporated as an LLC, you may declare that the LLC is taxed as an S Corp by filing Form 2553 with the IRS.

How to Calculate S Corp Taxes: A Step-by-Step Guide

Step 1: Determine S Corporation Net Income

Calculate your S Corporation's net income by subtracting business expenses from total revenue. This figure represents the income generated by the corporation, which will be allocated to shareholders based on ownership percentages.

Step 2: Allocate S Corporation Net Income to Shareholders

Distribute the S Corporation's net income to shareholders according to their ownership percentages. Each shareholder reports their share of the income on their personal tax returns, which helps determine their individual tax obligations.

Step 3: Calculate Self-Employment Taxes for Shareholders

Shareholders of an S Corporation are responsible for self-employment taxes on their salary portion, but not on their share of the net income. Use an S Corp tax calculator to determine the appropriate self-employment taxes for each shareholder.

Step 4: Make Estimated Tax Payments

Shareholders should make estimated tax payments throughout the year to cover their personal tax liabilities. These payments help avoid penalties and ensure taxes are paid in a timely manner.

S Corp vs C Corp

S corporations and C corporations differ significantly in tax treatment and ownership structure. S corps avoid double taxation by passing income to shareholders, while C corps are taxed at the corporate level and again on dividends.

Important Factors for Calculating S Corporation Taxes

How to Set a Reasonable Salary

A reasonable salary for an S corp owner should reflect industry standards and align with the services provided to the business to meet IRS requirements.

How to Calculate LLC Taxes

LLC taxes depend on the entity's classification. Single-member LLCs are taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships unless electing corporate taxation.

Comparison Between S Corp vs LLC Tax

While S corps benefit from reduced self-employment taxes, LLCs offer flexibility in tax structure. Choosing between them depends on income levels, business goals, and tax implications.

Summary

Using an S Corp tax calculator can simplify determining tax obligations and potential savings. This tool helps maximize S Corp tax savings and ensure accurate tax payments.

S Corporation Tax Calculator FAQs

What is an S Corporation Tax Calculator?

An S Corporation Tax Calculator helps business owners estimate their tax liability and potential tax savings by filing as an S Corporation.

Can the calculator help estimate tax liability for multiple shareholders?

Yes, the S Corp Tax Calculator can estimate tax liability for multiple shareholders, providing a comprehensive overview of the corporation's tax obligations.

What are the tax benefits of forming an S Corporation?

Forming an S Corporation can reduce self-employment taxes, as shareholders only pay self-employment taxes on their salary, not on their share of the net income.

What information do I need to use the S Corp Tax Calculator?

To use the S Corp Tax Calculator, you'll need information on your business revenue, expenses, and the number of shareholders and their respective ownership percentages.

Can I use this calculator to compare S Corp and LLC taxes?

Yes, you can use the S Corp Tax Calculator to compare the tax implications of an S Corporation versus an LLC, helping you make an informed decision.

How much will I save as an S Corp?

S corp savings vary based on your income and salary structure, but many owners save on self-employment taxes by designating a portion of income as distributions.

Can an S Corp help reduce self-employment taxes?

Yes, S corps reduce self-employment taxes by allowing business owners to pay themselves a reasonable salary and take additional income as distributions, which aren't subject to these taxes.

How often should I review my S Corp's tax situation?

It's a good idea to review your S corp's tax situation annually or whenever there are significant changes to your income, salary, or business operations.

What are the IRS rules for filing taxes as an S Corporation?

S corps must file Form 1120-S and distribute Schedule K-1 to shareholders, reporting income, deductions, and credits. Staying compliant requires accurate recordkeeping and timely filings.