How to Navigate S Corporation Tax Implications

If your business makes $50k a year or even $100k -> do NOT elect S Corp status. Instead, contact a tax professional who knows what they’re actually doing AND cares about you more than their own revenue to look at your specifics to make sure it’s a good decision. S Corp status means: 1: accountable plan 2: actual (documented) reimbursements 3: payroll ($50-$150/mo) 4: better bookkeeping (you should have this anyway but now its non negotiable). 5: S Corp tax return ($500-$1500 more than schedule c just for tax prep). 6: determine a REASONABLE compensation (like for real, not just a random number that saves you the most taxes). There’s a lot of extra fees there that go to your tax person… so make sure they explain that not only you’ll save enough to cover those extra costs (breaking even is stupid bc it’s more work for no benefit to you) but also enough to put some money back in your pocket. I’ve revoked several S Corp elections for new clients lately and I always say: “I’m happy to keep collecting these extra fees because it’s good for me (and the prior person who set this up) but it’s not good for you.” Anyone giving you a simple revenue or profit number to elect S Corp status either: 1: isn’t qualified to advise you bc they don’t understand when and why to do this Or 2: is doing it to generate the additional fees for themselves regardless of the benefit (or lack thereof) to you. There really is no other explanation for that blanket, bad advice. #writtenwithoutai

S-Corp salaries just made the AI watchlist. According to TIGTA’s May 27 report, the IRS is now feeding fresh tax return data into machine learning models to flag under-reporting—and low officer compensation is high on the list. This isn’t theoretical. If your client S-corp nets $800K and they paying themselves a $60K salary, they are exactly the kind of profile this new system is built to catch. Time for a little housekeeping before it’s too late. 1. Price the role, not the shareholder. Look at the services your client is actually providing—hours, responsibilities, scope and benchmark it like you would for any employee. Real comps and surveys in the industry, not gut checks. 2. Build the file. Keep the salary data, rationale, and adjustments in one place. If the return gets flagged, that file is the first line of defense. 3. Revisit it annually. Business evolves—so should comp. A salary that made sense two years ago might not hold up under today’s margins or expanded roles. Reasonable comp isn’t just a box to check, it’s one of the first things they’ll look at when your client’s return hits the model. We’re not paid to memorize the rules ; We’re paid to see the risk coming and fix it while it’s still possible. #CPA #TaxStrategy #SCorp #ReasonableCompensation #IRSAudit #TaxPlanning #Accounting

Thinking of paying yourself 100% in distributions from your S-Corp? Stop! It’s one of the most common and costly mistakes an S-Corp owner can make. I get the temptation. Distributions aren't subject to payroll taxes (that's 15.3% for Social Security & Medicare), while a W-2 salary is. Paying yourself entirely in distributions looks like a genius tax-saving move. But here’s the reality check. If you work, you're an employee. The IRS is very clear on this, If you are an S-Corp officer who actively provides services to your business, you are legally classified as an employee. And employees must be paid a salary. This is where the "Reasonable Compensation" rule comes in. Salary First, Distributions Second: You must pay yourself a "reasonable salary" for the work you actually do. Think of it as what you'd have to pay someone else to do your job. This salary MUST be paid through payroll, with all the proper income and payroll taxes withheld. Only the profits left after you've paid your reasonable salary (and all other business expenses) can be taken as a distribution. What Happens If You Don't? If the IRS audits you, they have the power to reclassify ALL your distributions as wages. This means you'll be on the hook for: All back payroll taxes (both your share and the company's) Steep penalties for failure to pay Interest on the entire amount That "simple tax-saving strategy" can instantly become a financial nightmare. The Bottom Line: The S-Corp is a powerful tool, but you have to follow the rules. Pay yourself a reasonable wage on payroll first, then enjoy the tax-advantaged distributions on the remaining profit.

A Brooklyn business owner making $215K wanted to switch to an S Corp to “save on taxes.” She heard she could avoid 15.3% in self-employment tax. And yeah, that’s true—but not if you live in NYC and don’t know the rules. NYC slaps an 8.85% tax on S Corps with NYC-sourced income. Most people don’t even know that’s a thing. She almost pulled the trigger. Would’ve ended up losing money instead of saving it. But we dug deeper. Turns out her clients were spread across the U.S.—not NYC. She worked remotely from home. So guess what? No NYC-sourced income. No NYC corporate tax. She got to keep the FICA savings—$17K. QBID still applied. Net win: about $13,000. All because we asked one question no one else did: Where’s your income actually coming from? The difference between smart tax strategy and a $13K mistake? Understanding sourcing. No one’s teaching this. But this is the stuff that actually saves money.

S Corporation Shareholders: Should You Elect to Reduce Basis for Nondeductible Expenses Before Losses? When an S corporation has both nondeductible expenses (think: penalties, 50% of meals, etc.) and losses, the default rule under Treas. Reg. § 1.1367-1(f) is that a shareholder’s stock basis is reduced first by losses, then by nondeductible expenses. However, Treas. Reg. § 1.1367-1(g) provides an election to switch the order—reducing basis first by nondeductible expenses and then by losses. Why Does This Matter? S corporation shareholders can only deduct losses to the extent they have basis in stock and/or debt. By making this election, shareholders may preserve the ability to deduct more losses sooner, depending on their situation. When Should You Consider This Election? ✅ If basis is limited—Prioritizing nondeductible expenses can help ensure they are absorbed rather than suspended. ✅ If you expect future income—By reducing basis for nondeductible expenses first, you may free up more room for loss deductions when basis is later restored. ✅ If you’re selling or terminating the S corp—It can help clean up basis adjustments, avoiding potential surprises. Pros & Cons of the Election: ✔️ Pros: Helps prevent nondeductible expenses from becoming permanently lost if basis isn’t restored. Can result in a larger current-year deductible loss if basis is tight. Reduces the risk of tracking suspended losses over multiple years. ❌ Cons: If future basis restoration is expected, suspending losses may have been preferable for maximizing deductions. Once made, the election is irrevocable, so consider long-term effects. More complexity in basis tracking and shareholder-level tax planning. How to Make the Election: The election must be attached to a timely filed (including extensions) original or amended return. It applies for all shareholders, not just one, so alignment with tax advisors and all shareholders is crucial. This is a great example of how small tax elections can have a big impact on an S corporation shareholder’s tax return. Have you ever made this election for a client? Let’s discuss! 👇 #SCorporation #TaxElections #BasisPlanning #CPAlife #TaxStrategy #SCorporationTax

When starting a business, one of the most critical decisions you'll make is selecting the right entity type. As a fractional CFO, I've seen numerous instances where businesses are set up or run under the wrong entity type, leading to significant tax implications. For example, I've encountered business owners who chose to operate as a regular LLC. While an LLC provides flexibility, it also means that all income flowing through the LLC is subject to payroll taxes. This can lead to a higher tax burden, as every dollar earned is taxed as if it were a salary. A more tax-efficient option could be to elect S Corp status for the LLC. By doing so, a portion of the income can be taken as owner distributions rather than a salary, which reduces the amount of income subject to payroll taxes. For instance, if an LLC generates $100,000 in income, every dollar could be taxed for payroll purposes. However, with an S Corp, the owner might choose to take $60,000 as salary (subject to payroll taxes) and $40,000 as a distribution (not subject to payroll taxes). Let's walk through a detailed example comparing the payroll taxes paid by a standard LLC and an LLC that has elected S Corp status. Scenario: Total Business Income: $100,000 Salary to Owner: In the S Corp example, we'll assume the owner takes a reasonable salary of $60,000, and the remaining $40,000 is taken as owner distributions. Payroll Taxes Overview: Social Security Tax: 12.4% (split equally between employer and employee, 6.2% each) Medicare Tax: 2.9% (split equally between employer and employee, 1.45% each) LLC (No S Corp Election): In a regular LLC, all $100,000 of income is subject to self-employment taxes. Self-Employment Taxes = $100,000 × 15.3% = $15,300 LLC with S Corp Election: With S Corp election, the owner takes a salary of $60,000, and the remaining $40,000 is taken as a distribution, not subject to self-employment taxes. Salary Portion Subject to Payroll Taxes: $60,000 Social Security Tax: $60,000 × 12.4% = $7,440 Medicare Tax: $60,000 × 2.9% = $1,740 Total Payroll Taxes on Salary = $7,440 + $1,740 = $9,180 The $40,000 taken as a distribution is not subject to payroll taxes, so: Total Payroll Taxes Paid by S Corp LLC = $9,180 Savings with S Corp Election: LLC (No S Corp Election) Total Taxes: $15,300 LLC with S Corp Election Total Taxes: $9,180 Tax Savings: $15,300 - $9,180 = $6,120 Summary: By electing S Corp status, the business owner can potentially save $6,120 in payroll taxes on $100,000 of income by taking a portion as owner distributions. This highlights the importance of choosing the right entity structure, as it can have a significant impact on your tax obligations. Although at K-38 We are not "tax CPA's", we've been doing this long enough that we know the tax ramifications of using the wrong entity type. As your fractional CFO, we are always looking to reduce your taxes!

As a financial advisor for commercial real estate brokers, I often have insightful conversations about tax planning and optimizing business structures. In a recent call, I walked a broker through the pros and cons of setting up an S-corp. Some key takeaways: • S-corps can provide tax savings through reduced self-employment taxes and other deductions, but also come with compliance requirements that can get complex. The annual cost of operating one is around $3,500. • The tax savings typically start to outweigh the costs around $100k of net income. The biggest benefits come from self-employment tax savings and the Qualified Business Income deduction. • It's crucial to implement payroll, bookkeeping and tax return prep services to maximize the benefits. DIYing it can cause you to miss key savings. • Timing matters. Costs are staggered so it's ideal to set up the S-corp in January to shift expenses into the next year. Retroactive tax savings are limited. • Beyond the S-corp structure, having a financial advisor optimize your setup as your income grows can boost savings further. The key is being intentional about when and how you implement these structures. With the right team in place, an S-corp launches you towards higher net worth as your career takes off. Let me know if you need guidance optimizing your own situation!

“Don’t move to S Corp, you will need to pay yourself a reasonable salary at or above social security wage base so it won’t help much” Okay… so I am following up yesterday's post with this one because I also see this said a lot Let’s look at an example: Let’s say you are like one of the many business owners I work with You are a non SSTB and have about $800k of profit in your business - you’re a solopreneur with no employees. Let’s then assume you’re going to max out your solo 401(k). You’ll be able to max this out at $69,000. If you are a single member LLC, you would pay self employment taxes on this whole amount of $800,000. You’d end up owing $42,332 in self-employment taxes. Then for QBID, you would get $0 from the deduction Why? When your taxable income is this high, the equation becomes the lesser of 20% of business profits or 50% of W2 wages Since no wages are paid, the lesser of the deduction is $0 Now… let’s look at an S Corp For example, you set up a reasonable salary of $300,000 You would owe around $28,940 for employment taxes on your wages. Then you would owe another $243 in additional medicare tax Let’s again assume you’re going to max out your solo 401(k) This will reduce profit of the business by $46,000 (but this does not reduce self employment taxes) and defer another $23,000 of your wages (also is not pre FICA taxes) So, business profit would be $800,000 - $300,000 - $14,470 - $46,000 = $439,530 Now we’ll take a look at how this impacts QBID. You’ll take the lesser of 50% of wages, or 20% of profit. 50% x $300,000 = $150,000 20% x $439,530 = $87,906 You’re allowed to deduct that $87,906. Note: If reasonable salary analysis shows it does not need to be that high, than you could decrease salary to get these closer to an equilibrium To compare the taxes directly: Single member LLC: - Self employment taxes: $42,332 - Additional medicare tax: $4,399 - Income taxes: $178,971 Total taxes: $225,702 S Corp: - Additional medicare tax: $243 - Employment taxes: $28,940 - Income taxes: $155,612 Total taxes: $184,795 Total S Corp savings: $40,907 Again, there are added costs with the additional complexity of an S Corp, but at this income level, the savings are a ton. Incredible impact

A common question I get from new tax preparers is why a 𝐬𝐢𝐧𝐠𝐥𝐞-𝐦𝐞𝐦𝐛𝐞𝐫 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐨𝐰𝐧𝐞𝐫 would choose to 𝐟𝐢𝐥𝐞 𝐚𝐬 𝐚𝐧 𝐒-𝐂𝐨𝐫𝐩 𝐢𝐧𝐬𝐭𝐞𝐚𝐝 𝐨𝐟 𝐫𝐞𝐩𝐨𝐫𝐭𝐢𝐧𝐠 𝐢𝐧𝐜𝐨𝐦𝐞 𝐨𝐧 𝐒𝐜𝐡𝐞𝐝𝐮𝐥𝐞 𝐂 𝐨𝐫 𝐒𝐜𝐡𝐞𝐝𝐮𝐥𝐞 𝐄. The common 𝐚𝐧𝐬𝐰𝐞𝐫 is to 𝐬𝐚𝐯𝐞 on 𝐬𝐞𝐥𝐟-𝐞𝐦𝐩𝐥𝐨𝐲𝐦𝐞𝐧𝐭 𝐭𝐚𝐱𝐞𝐬, which is 𝐩𝐚𝐫𝐭𝐥𝐲 𝐭𝐫𝐮𝐞. Let’s break it down. First, let’s look at how an 𝐒-𝐂𝐨𝐫𝐩 can 𝐡𝐞𝐥𝐩 𝐬𝐚𝐯𝐞 on 𝐬𝐞𝐥𝐟-𝐞𝐦𝐩𝐥𝐨𝐲𝐦𝐞𝐧𝐭 𝐭𝐚𝐱𝐞𝐬. Imagine a taxpayer has $𝟐𝟎𝟎,𝟎𝟎𝟎 𝐢𝐧 𝐢𝐧𝐜𝐨𝐦𝐞. If they report it on 𝐒𝐜𝐡𝐞𝐝𝐮𝐥𝐞 𝐂, they would pay a self-employment tax of 15.3%, which equals $𝟑𝟎,𝟔𝟎𝟎. But if the business is structured as an 𝐒-𝐂𝐨𝐫𝐩 with the same $200,000 income, the owner might take a 𝐫𝐞𝐚𝐬𝐨𝐧𝐚𝐛𝐥𝐞 𝐬𝐚𝐥𝐚𝐫𝐲 𝐨𝐟 $𝟖𝟎,𝟎𝟎𝟎, paying 𝐩𝐚𝐲𝐫𝐨𝐥𝐥 𝐭𝐚𝐱𝐞𝐬 of 15.3% on that amount, which comes to $𝟏𝟐,𝟐𝟒𝟎. The remaining $120,000 can be distributed, which are 𝐧𝐨𝐭 𝐬𝐮𝐛𝐣𝐞𝐜𝐭 𝐭𝐨 𝐬𝐞𝐥𝐟-𝐞𝐦𝐩𝐥𝐨𝐲𝐦𝐞𝐧𝐭 𝐭𝐚𝐱. This results in a 𝐭𝐚𝐱 𝐬𝐚𝐯𝐢𝐧𝐠𝐬 𝐨𝐟 $𝟏𝟖,𝟑𝟔𝟎 ($30,600-$12,240) compared to filing with Schedule C. But here’s 𝐰𝐡𝐲 I say the 𝐬𝐞𝐥𝐟-𝐞𝐦𝐩𝐥𝐨𝐲𝐦𝐞𝐧𝐭 𝐭𝐚𝐱 𝐬𝐚𝐯𝐢𝐧𝐠𝐬 are 𝐨𝐧𝐥𝐲 𝐩𝐚𝐫𝐭 of the picture. Whether the S-Corp is the right choice depends on the 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐦𝐨𝐝𝐞𝐥. For example, S-Corp is 𝐬𝐮𝐢𝐭𝐚𝐛𝐥𝐞 for 𝐬𝐞𝐫𝐯𝐢𝐜𝐞-𝐛𝐚𝐬𝐞𝐝 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬𝐞𝐬 like doctors, engineers, or attorneys, where income comes primarily from the owner’s expertise. However, an S-Corp is often 𝐧𝐨𝐭 𝐚 𝐠𝐨𝐨𝐝 𝐜𝐡𝐨𝐢𝐜𝐞 for 𝐫𝐞𝐧𝐭𝐚𝐥 𝐫𝐞𝐚𝐥 𝐞𝐬𝐭𝐚𝐭𝐞 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬𝐞𝐬 and could end up costing more in taxes which I have explained in detail in my previous posts. So, when deciding on an S-Corp, it’s important to consider 𝐧𝐨𝐭 𝐣𝐮𝐬𝐭 the potential 𝐬𝐞𝐥𝐟-𝐞𝐦𝐩𝐥𝐨𝐲𝐦𝐞𝐧𝐭 𝐭𝐚𝐱 𝐬𝐚𝐯𝐢𝐧𝐠𝐬, but also whether the 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐦𝐨𝐝𝐞𝐥 is a 𝐠𝐨𝐨𝐝 𝐟𝐢𝐭. 𝐍𝐨𝐭𝐞: This example doesn’t account for additional taxes like the 0.9% Medicare surtax or the deduction for half of the self-employment tax. #cpa #cpafirm #ustax #ustaxation #taxplanning #realestate #irs #learning #taxseason

More S Corps may not = more tax savings. ------------------- The big value in running a business as an S Corporation is payroll tax savings. If you have ONE S Corp in your tax structure, you *may* be saving payroll taxes. If you have MULTIPLE S Corps in your tax structure, you are VERY LIKELY paying MORE payroll taxes than if you only had ONE. Why? The IRS expects S Corporations to pay their owners/officers a REASONABLE salary. Salaries = payroll taxes. Multiple S Corporations with the same or similar ownership >> multiple sources of W2 wages to the owner(s) >> redundant payroll taxes paid. While YOU as an individual might receive a credit on your personal tax return for overpaid Social Security taxes, your S Corp does NOT. Further, the IRS expects every S Corporation complies with reasonable compensation rules - regardless of ownership. Saying "but ONE of my S Corps paid my salary for ALL my S Corps" doesn't cut it. ------------------- If your business empire is growing, be careful making new entities S Corps simply because an S Corporation has worked well for your primary business. The tax structure that may have served you in the past may not going forward. Talk to your tax and business advisors before adding on that next entity.