S Corporation
A tax election allowing pass-through taxation with salary requirements.
An S corporation is a tax election (not a business entity type) that allows business income to pass through to the owner's personal tax return, avoiding double taxation. S-corp owners who actively work in the business must pay themselves a "reasonable salary" subject to payroll taxes, but remaining profits distributed as dividends avoid self-employment tax. This creates significant tax savings for profitable businesses.
Example
An LLC earning $150,000 elects S-corp status—the owner pays herself a $70,000 salary (subject to FICA) and takes $80,000 as a distribution, saving approximately $12,000 in self-employment taxes.
Why It Matters for Your Business
The S-corp election can save thousands in self-employment taxes annually, but it comes with salary requirements and additional compliance costs.
Practical Tips
- •The S-corp tax savings typically become worthwhile when net business income exceeds $50,000–$60,000.
- •Set a "reasonable salary" based on what you'd pay someone else to do your job—the IRS penalizes unreasonably low salaries.
Related Terms
More Business Terms
Accounts Reconciliation
Ensuring account balances match between different records.
Break-Even Point
The sales volume at which revenue equals costs.
Budget
A financial plan estimating income and expenses.
Financial Forecast
A prediction of future financial performance.
Capital Expenditure
Funds used to acquire or upgrade physical assets.
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