S Corps Can Also Provide Big-Time Tax Benefits

S Corps offers a major tax benefit, as business income passes directly to each shareholder without the need for separate corporate taxation. This is known as the “pass-through” concept and provides an attractive alternative to sole proprietorships and C Corps. The lack of additional taxes means these businesses save considerably on their annual filing. With this advantage in mind, S Corps are becoming an increasingly popular choice among entrepreneurs and small business owners. Contact Us Now To Get a DCRegistered Agent.

For independent real estate investors and contractors, it's important to remember that you are both the employer and employee of your business. This means that, as an employee, you should pay yourself a reasonable salary and be taxed accordingly - while the S corp itself pays no taxes. To get the most out of incorporating as an S corporation over a sole proprietorship or traditional corporation, it's essential to understand what constitutes a reasonable salary. How Do Corporations Raise Money?

How Do the Self-Employed Determine a “Reasonable Salary”?

It's essential to get a reasonable salary just right when it comes to an S corporation's shareholder-employee. That's because it'll be treated as wages for tax purposes and, of course, the IRS will be on the lookout. The good news is the IRS has provided factors you can use to decide what that salary should be. These criteria ensure Social Security and Medicare taxes are correctly funded––no small feat! So keep these IRS guidelines in mind when deciding your employee’s pay. It’ll make sure everything goes smoothly come tax time. Contact Us Now To Get a DCRegistered Agent.

When determining what amount of salary to pay oneself as an owner/employee/shareholder of an S corp, the Internal Revenue Service (IRS) guides the relevant factors. These include training and experience; duties and responsibilities; time and effort devoted to the business; dividend history; compensation agreements and even a formula for determining compensation - though this only applies in cases where there are multiple employees. When it comes to individually-owned S corps, which are common among independent contractors and real estate investors, these do not usually come into play. Plumbing contractor’s license?

Rather than resorting to generic assumptions, it is a good idea to consult with a certified public accountant or lawyer to accurately calculate the percentage of business profits devoted to salary. Estimates of reasonable compensation range from 33:67 up to 50:50, and even 60:40. However, these are just ballpark figures and should not be used as definitive answers. A Brief Guide to the Sole Proprietorship Resolution Form.

What's the Difference Between S Corporations & Sole Proprietorships?

• A sole proprietorship is a business owned and operated by one individual, while an S corporation is a legal entity separate from its owners.

• Sole proprietorships are the simplest forms of business structure and make up the majority of small businesses in the United States. Sole Proprietorship.

• An S corporation is formed when a business registers with the state as an LLC or corporation and then elects to be taxed as an S corporation with the IRS.

• For tax purposes, a sole proprietorship reports income on the owner’s tax return, while an S corporation files its corporate tax return.

• The major advantage of being an S corp over being a sole proprietor is that it provides pass-through taxation. Also, check the LLC Registration Form.

What's the Difference Between S Corporations & Traditional Corporations?

• As you now know, S Corporations are taxed as "flow-through" entities, meaning all profits or losses are passed through to the shareholders and reported on their tax returns.

• Meanwhile, traditional corporations pay taxes on their profits at the corporate level before any distribution is made to shareholders, who then pay taxes on dividends received.

• S Corporations have a limited number of shareholders (typically 100 or less) while traditional corporations can have an unlimited number of shareholders.

• S Corporation owners receive salaries, although they must pay themselves reasonable wages set by the IRS. In contrast, traditional corporation owners do not need to receive salaries to be paid for services rendered. What services do we provide?

Also, Consider Forming an LLC (Limited Liability Company)

An LLC, or Limited Liability Company, is a legal structure for your business that shields your assets from potential liabilities. That means if you're sued by a client, the only thing on the line will be your company's resources – not your possessions like bank accounts, cars, and real estate. This separation between you and your business is unique to LLCs – something that doesn't exist with sole proprietorships. If you are looking to protect yourself as an entrepreneur, setting up an LLC could be the right choice for you. How Long Does It Take To Get an LLC?

How Are S Corps & LLC Connected?

An LLC can opt to be taxed as an S corp, and you don’t have to choose just one. You must first become a registered LLC or other qualifying corporation before you can elect to be taxed as an S corp. Going from sole proprietor status directly to S corp isn’t allowed. Note that federal tax laws govern the taxation of S corps, while LLCs are state-level entities so choosing this form of taxation won't change your membership in your home state - for instance, if you're an LLC registered in Wyoming and file for S corp status with the IRS, it does not affect Wyoming's view of you as an LLC. Visit Corporate Power of Attorney

Conclusion

Do you work as an independent contractor or real estate investor? If so, setting up your business as a corporation registered with the IRS as an S corp may be worth considering. Our knowledgeable team at LegalRegistration.com can provide advice concerning this option and assist you with calculating an appropriate salary under the S-corp structure. Don't hesitate to reach out and ask us any questions that come to mind – we're here to help! How Do Corporations Raise Money And Resources To Expand?