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S Corporation Taxes


Now, I know what you're thinking. You're thinking that corporate structure sort of stinks. You started the business. You worked hard to make the business profitable. You gave birth to the corporation, and, now, like an ungrateful child, it begrudges you a measly $100 for a gift.

But to get your money from your corporation, you have two primary ways to go.

Have the Corporation Pay You a Salary

First, as an employee of the corporation, you're entitled to just compensation for any services you render the corporation. As the president of your corporation, you're entitled to a salary. So, you may have the corporation pay you a salary. This is the first way most entrepreneurs remove money from an incorporated business. Many of the 30 IRS forms you wondered about are probably employer tax forms. (Employment taxes are an entire topic themselves.) And the short answer is that they all apply to you!

As you probably know, when you receive wages, you report those on line 7 of your 1040 and attach your Forms W-2. This is also true for wages paid from your corporation. You need to prepare a W-2 to give yourself, just as you send other employees a W-2, so they can figure their taxes. Wages paid to employees are tax deductible to the corporation paying them. The disadvantage to paying yourself a wage is that wages are subject to various employment taxes, for example, Social Security and Medicare taxes, in addition to income tax.

While corporations don't pay self-employment taxes (you're an employee of the corporation and not self-employed), paying yourself a wage lops off about 16% of the wage in employment taxes. And, while this wage is a fully-deductible business expense to the corporation, you do pay personal income tax on the money received. However, this isn't what's usually meant by "double taxation."

Have the Corporation Pay You Dividends (Double Taxation)

The second primary way you can get money from your corporation is via dividend payments. Because you're a shareholder of your corporation, you can receive corporate dividends. When a corporation pays dividends, it usually also sends you (the shareholder) a Form 1099-Div, which helps you know how much you received in dividends and helps you prepare your personal income taxes.

Many of the corporate tax forms filed are "information forms" in that they either provide the government or interested parties information. Whenever you must provide certain forms to investors, employees, or other parties, be sure to check to see if the forms must also be filed with any government agency. If copies must be filed with the government, you'll sometimes discover another form must accompany them. These are called "transmittal forms."

For example, to report 1099s, file a 1096 with the 1099's. To report W-2s, you also file a W-3. Now, as you recall, a corporation is a separate taxable entity. So, if the corporation earned $1,000, it pays taxes on the $1,000. Suppose $850 remains after paying corporate income tax. Suppose that this $850 is paid to you as a corporate dividend. Then, you, as an individual taxpayer, must also pay income tax on the dividend received. After paying income tax at your personal marginal tax rate, you maybe have $600 in your pocket after all taxation. So, you effectively paid 40% of your earnings in income tax. And, this assumes relatively low tax brackets at both the individual and corporate level! This is what is meant by "double taxation."

Double taxation usually means that a corporation has earnings which were taxed as income to the corporation. Then those earnings were paid as dividends to the shareholders. The shareholders need to pay personal income tax on the dividends received. Needless to say, you don't want to pay an effective 40% income tax rate or more!

That's where the S corporations come in! continued

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