S-Corp Tax: A Tax-Efficient Business Structure

An S-Corporation (S-Corp) provides significant tax benefits compared to a C-Corporation by eliminating double taxation. While C-Corp profits are taxed at both the corporate level and again when distributed to shareholders, an S-Corp passes profits and losses directly to shareholders, who report them on their personal tax returns. This structure helps reduce overall tax liability while maintaining corporate liability protection.

How to Pay Yourself as an S-Corp Owner

S-Corp shareholders who actively participate in daily operations are considered both employees and shareholders, while passive investors are only shareholders. The way you compensate yourself depends on your level of involvement.

1. Salary (Required for Active Shareholders)

If you work in the business, the IRS requires you to take a reasonable salary—one that aligns with industry standards. This ensures that S-Corp owners don’t evade payroll taxes by taking all earnings as tax-free distributions. Underpaying yourself can lead to IRS penalties, back taxes, and fines.

2. Distributions (For Passive Income)

Once a reasonable salary is paid, S-Corp shareholders can receive profit distributions. These payments aren’t subject to payroll taxes, making them a tax-efficient way to take additional income. However, distributions are only tax-free up to the shareholder’s stock basis—exceeding this amount may result in additional taxes.

3. Combining Salary & Distributions

For shareholder-employees, the best approach is a combination of salary and distributions. This allows business owners to minimize tax liability while staying compliant with IRS rules. Since tax regulations can be complex, consulting with a tax professional ensures you set a reasonable salary and optimize distributions without triggering penalties.

At iTax Filer, we help business owners navigate S-Corp taxation, ensuring you maximize tax benefits while staying compliant. Let’s optimize your tax strategy today! 🚀