S-Corporations - What Are They and How do They Work?

Most corporations can make a special election to be treated as an "S-corporation" for Federal income tax purposes.

An S-corporation differs from a regular corporation in the following ways:

An S-corporation does not generally pay an entity-level tax. Instead, it passes through the income and other reportable items to its shareholders on Schedule K-1, and they include it on their personal returns.
While the above is similar to the way a partnership works, two important distinctions: An S-corporation has the limited liability protection that is offered by the corporate form. Also, net pass- through earnings from an S-corporation are not subject to self-employment tax.

Note: Despite a popular misconception, you CANNOT avoid FICA or SE tax by forming an S-corporation. You are still required to draw a salary, subject to payroll taxes, that is reasonable for the value of the services you provide to the corporation.

Unlike a regular corporation, shareholder-employees of an S- corporation cannot receive tax-free employee benefits (except a pension). Any medical insurance, life insurance, etc. must be charged to the shareholder-employee as additional wages.

Disclaimer
We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.