Tuesday, July 29, 2008

Taxes For My Business - S Corporation

Information, resources, and links related to your business's tax strategy for a S-Corporation.

Published By: Knowledgeman
Published: 2008-07-29
Revised: 2016-03-23

Table of Contents

S-Corporation Tax Considerations

Federal Taxes

Income Tax & Payroll Taxes
IRS Web Page For S Corporations (IRS)

Officers of an S-Corporation
Distributions and other payments by an S-Corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services to a corporation.

Income Tax Withholding
Federal Social Security Tax (FICA): 6.2%
Federal Medicare Tax: 1.45%

S-corporation companies with employees must pay their share of social security, plus match what the employee contributes. Therefore they would have to pay 12.4% on the first $113,700 of wages. They would also have to match the employee’s medicare tax. They would then have to pay 2.9% for medicare no matter how much the employee’s wages were.

Federal Unemployment Tax (FUTA): 6.0 % on 1st $7,000 of wages
The FUTA tax is 6.0% of your employee’s FUTA wages. However, you may be able to take a credit of up to 5.4%, resulting in a 0.6% net of tax.

Pennsylvania Taxes

Pennsylvania Unemployment Tax (PAUTA)
S-corporation Employees: 3.4254% on 1st $8,500 of wages
S-corporation major shareholders and officers: 3.4254% on 1st $8,500 of wages (*see note below)
*(The business owner or S-corporation major shareholder) that receives a paycheck or salary from the S-corporation is required by Pennsylvania law to pay unemployment taxes the same as any other employee of the S-corporation. The business owner or S-corporation major shareholder that receives a paycheck or salary from the S-corporation is not eligible to receive unemployment benefits from the state of Pennsylvania if the S-corporation fails or closes.

PA Unemployment Compensation Information abd Documents (PA Dept Labor and Industry)

Pennsylvania Income Tax
An S-Corporation is taxed like a partnership or sole proprietorship, rather than a separate entity. Thus, the income is passed through to the shareholders for tax liability purposes. The shareholders individual tax returns will report the income or loss generated by an S-Corporation. The corporation is required to pay a 1% local tax for each employee in the company.

Calculating Your Estimated Tax Payments (Business Owners Toolkit)

Other facts:
An S-Corporation is limited to 75 shareholders.
The S-Corporation is not taxed on earnings because all income and losses are passed through to the shareholders.
A form K-1 must be distributed to all individuals.
Even if you receive a salary, you still have to make estimated tax payments if the amount being withheld is insufficient.

Many S-Corporations reduce compensation payments to shareholder employees in hope of limiting the amount of FICA and Medicare taxes.

Federal Social Security Tax (FICA) = 12.4% on $113,700 of wages (6.2% employer, 6.2% employee) per individual.

Federal Medicare Tax
= 2.9 % on all wages (1.45% employer, 1.45% employee) per individual. A company with employees must pay his or her share of social security, plus match what the employee contributes. Therefore they would have to pay 12.4% on the first $113,700 of wages. They would also have to match the employee’s medicare tax. They would then have to pay 2.9% for medicare no matter how much the employee’s wages were.

Compensation Issues For S-Corporations (IRS.gov)

It is attractive to limit compensation and allow more income to flow through the S-Corporation without payroll taxes (avoid self employment taxes). S-Corporations income passed through to stockholders is subject to state and federal income tax, but it is not subject to self employment tax when employee/stockholders receive adequate compensation (salaries) for their labor and management input to the business. Pay of corporation employees (salaries) are subject to payroll taxes in the same manner as is the case for employees in any other type of economic activity.

If a S-Corporation generates substantial cash (earnings) not used in the operation of the corporation, that cash can be distributed to a shareholder on the basis of his or her ownership interest and not as a taxable dividend distribution.

Google Search: s-corp compensation tips

Additional Information, Articles, and Links
Tax Tips & Audit Strategies for S-Corporation Shareholders (About.com)