How S Corporations Can Avoid Double Taxation
Any time a new business is formed; several important decisions about how the company will be structured must be made. The choices made at inception will dictate how things are done in the future, and will play a vital role in the company’s financial viability. One decision that must be made quickly after formation is what type of corporate designation to give a company. There are choices that protect the owners, such as limited liability companies and professional corporations; and there are other forms of companies that have certain tax advantages. One of the most popular types of companies is the S Corporation, because this type of entity enjoys tax benefits not available to other companies.
An S Corporation is taxed differently than other forms of companies, and this means the company can avoid double taxation as follows:
- Shareholders have the ability to act as both employer and employee. This means when profit is distributed, it can be done without employment taxes being imposed if the distribution is made properly. One way for a shareholder of an S Corporation to receive an income while not feeling the full pinch of taxes being withheld is to take a dividend payment. Dividend payments are taxed differently than wages, and this is one way to avoid paying taxes more than once.
- The dividend payments made are not subject to corporate taxation. This will save you from paying taxes as both the corporation and the individual self-employment tax.
If you elect to operate as an S Corporation, be mindful of the fact that if your dividend payments are out of proportion to the salary you draw, red flags may be raised with the IRS. Special care must be taken to ensure the percentage of payments made to shareholders as a dividend payment is not significantly higher than the percentage of payments made as a reasonable salary. It should also be noted that you do not need to create a corporation to receive the tax benefits of Subchapter S; an LLC can elect to be taxed as an S Corporation as well. A skilled legal tax professional can help you structure your company, and the way it pays you as the owner, in a way that minimizes your tax liability. Call us today and let us help you develop a business strategy that works.
Let the professionals at Nielsen Law Group help you with all your tax needs. Call (480) 888-7111 or submit a web request here. Our team of experienced legal tax professionals is here to help you with your tax related matters.