One common question that S-corporation shareholders ask is whether they need to pay self-employment taxes. This is a very tricky question because there are a lot of factors to consider, such as how the company is structured and its location. S-corporations are not responsible for paying taxes to the IRS, meaning that they have no corporate income taxes or payroll taxes, but shareholders do have to pay personal income tax on their earnings.
LLC vs S-corporation: What is the difference?
S-corporations are very similar to LLCs. The biggest difference is that S-corporations are taxed differently than LLCs.
LLCs pay an annual fee to the state where they are doing business. This fee is required of the LLC but is not required of the shareholders. S-corporations, on the other hand, are required to pay an annual franchise tax to the state. This franchise tax is not required of the shareholders, but the corporation must still pay it.
S-corporations are pass-through entities. This means that they do not pay gross or net income taxes. Instead, they pass these profits through to the shareholders,
Tax planning-tax advice for individual S-Corporation shareholders
The income that S-corporation shareholders receive is also considered self-employment income. Shareholders, as the owners of an S-corporation, must report their earnings on IRS Form 1099-MISC, which is given to shareholders when they earn more than $600 from a corporation.
Shareholders are required to include these earnings on their tax forms, but some of the income they receive may also qualify for certain tax deductions. For example, shareholders who earn income from an S-corporation that is operated as a sole proprietorship or a partnership may be able to deduct expenses related to their business.
In general, S-corporation shareholders can deduct expenses incurred from the operation of an S-corporation, including:
– Rent
– Business supplies
– Use of personal vehicle(s)
– Professional fees
– Advertising
– Stock compensation
– Employee benefits
The shareholders of S-corporations are required to pay taxes on their share of the company’s earnings. Shareholders must pay taxes on all earnings that they receive.
Conclusion
As a shareholder in an S-Corporation, you should always be familiar with the tax laws that affect the business. One thing that every owner will have to keep track of is the entity’s income tax rate. When you’re not sure if your particular company is eligible for a lower tax rate, make sure to consult with a tax professional such as Abbo Tax CPA for more information about S-corporations, tax preparations and CPA in San Diago.
