S Corporation Tax Savings Calculator
If you're a sole proprietor and reeling at the amount of self-employment and income tax you pay, it may be time to review your business status. Choosing to file as an S Corporation may be financially advantageous and help save money on taxes.
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 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.
