Question: Have you noticed that the self-employment tax significantly drains your cash?
The S corporation can help you reduce the amount of federal employment taxes paid on your wages.
The S Corporation:
👉Deducts the W-2 wages;
👉Passes the remaining taxable income to you—the shareholder who reports the income on his Form 1040; and
👉Makes cash distributions to you tax-free—the shareholder.
The tax basis of your stock in a passed-through S corporation increases when it reports taxable income, so cash flow distributions are usually federal-income-tax-free.
This tax regime places S corporations in a more favorable position than equivalent businesses conducted as sole proprietorships, single-member LLCs, partnerships, and multi-member LLCs.
S corporations can pay shareholder-employees modest salaries and distribute the remaining corporate cash flow through federal-employment-tax-free distributions.
Do you want to stop overpaying self-employment income taxes?