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But you will only pay self-employment taxes on the part of the profit you call "wages".If you call only ,000 of that 0,000 "wages," you will pay employment taxes not on the full 0,000 of profit but rather only on the ,000 of wages.But that wasn't a problem when, for all practical purposes, only sole proprietorships, partnerships and corporations even existed for business tax law purposes.Predictably, people started calling these corporations which made the election to use the rules "Subchapter S corporations" and then, later, "S corporations" or "S corps".Self-employment taxes (as well as the equivalent Social Security and Medicare taxes), run about 13% (after making some adjustments you don't need to worry about right now).
That'll take you to a page that describes the steps for setting up an S corporation in your state and provides an inexpensive downloadable kit you can purchase if you think you need help. Don't rush into the S corporation decision just yet.
The rules governing distributions from C corporations differ from the rules that apply to distributions from S corporations.
To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend. The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock. Any remaining portion is treated as gain from the sale or exchange of property (capital gain). Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability. Special rules also apply at the corporate level. Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions).
Tweet This website grew out of a graduate tax class I taught at Golden Gate University's tax program several years ago.
The site provides you with all sorts of background on S corporations, including do-it-yourself downloadable kits.
But before you start poking around the FAQ (a great place to dig deeper into subject matter), let me give you some background information on Subchapter S corporations.