How to Know If Your Business Should Have an S-Corp Strategy


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This article is part of the End of Year Tax Tips Series from tax and legal expert Mark J. Kohler.

When it comes to tax strategies for entrepreneurs, I am convinced that the S-Corporation (S-Corp) is one of the most powerful long-term strategies to build upon. The tax benefits, audit protection and foundation for other tax deductions are absolutely amazing in an S-Corp. Frankly, it’s because the S-Corp is so financially efficient for the small-business owner.

So for those of you that are already S-Corps, this is the time of year to dial in your salary level. See my Payroll Matrix and suggestions on how to peg the perfect salary amount for your situation below.

For those who haven’t quite caught the vision or potential of the S-Corp, let me make a few important points and explain some of the benefits you are missing out on.

S-Corps: The Reason Why

The problem we’re trying to solve is that if you sell products or services, receive a commission, flip properties or receive 1099s and generally create ordinary income with a business, you will pay self-employment tax of 15.3 percent on all your net income if you are a sole proprietorship, whether you have an LLC or not.

The S-Corp allows you to minimize this dreaded self-employment tax. When using an S-Corp, your share of the company’s net income will not be subject to self-employment (SE) tax. (SE tax is a combination of Social Security and Medicare taxes also referred to as FICA.)