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Answer from our Guest Expert Kent Capener of Capener Consulting PAGE4 The Tax Factor Here's the basic difference between a C corporation and an S corporation. In the C variety, taxes are owed and due from the operations of the business. Your pay (salary) is an expense and you pay your tax rate on the income you take as salary or W-2 income. In the S variety, taxes are owed and due from the operations of the business proportionately equal to the ownership of the business by individuals (by the percentage of ownership). The profits are passed through to the owners. The corporation doesn't pay any income taxes, but the owners do, based on their personal tax situation. The profits, if any, are treated as personal income. For example, let's say your business profits $100,000. A C-corporation 1999 tax rate would be $22,250 or 22.25%. You and your partner each take $100,000 in salary and you are both single. Your individual tax liability is $14,138.50 plus 31% of the amount over $62,450, or $11,640, so you would pay a total of $25,778.50 each in tax or in effect 25.8%. You, and in this case I mean you, your partner, and your business, have a total tax liability of approximately $73,807. So let's now look at what would happen if you were an "S" corporation, equally owned 50/50. You still take your $100,000, but not as salary, as officer compensation and your business profits $100,000, which is split equally, $50,000 each. There is no corporate tax liability. Each partner's tax liability is based on $150,000 in income. Individual tax liability is $35,156.50 plus 36% of the amount over $130,250, or $7110.00 for a total of $42,266.50 each and $84,533 in total. Whew! But what's the difference in your pocket? Your salary from your C-corp netted you $74,221.50 and no income from the profits. Your officer's compensation and profits distribution netted you $107,333.50. But what if you reinvest the profits? Then your officer compensation of $100,000 would net you the same $74,221.50. And your profits would go to bettering your business instead of your pocket and/or a share to the government. An accountant can give you a detailed tax analysis based upon your choices and it is recommended that you do that to take into account all the variables.
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