Business
S-corporation
A tax election under which a business pays its owner a salary and passes the remaining profit through to them without self-employment tax.
Also called S-corp, Subchapter S.
It is an election, not an entity. An LLC or a corporation can elect it by filing Form 2553. The business then files Form 1120-S and issues a K-1 to each shareholder.
The appeal is the split. The owner must be paid a reasonable salary, which carries payroll tax, and profit distributed beyond that salary does not carry self-employment tax. The saving is real and so is the cost: payroll filings, a separate return, and a defensible salary figure.
Distributions in excess of basis are taxable. Basis has to be tracked, and it is the part most often neglected until it matters.
In Contha
Contha does not keep an S-corp’s books yet. Its S-corp calculator compares the two paths from your own profit.
Related
Terms that come up beside this one
LLC
A legal structure that separates a business’s liabilities from its owners, formed with a state.
Reasonable compensation
The salary an S-corporation owner must pay themselves for the work they do before taking profit as distributions.
Basis
What you have invested in a business for tax purposes, adjusted each year for profit, loss and distributions.
Schedule K-1
The statement a partnership or S-corporation issues to each owner reporting their share of its income, deductions and credits.