Whether you’ve had your S Corporation for a while or you’re new to the idea, it’s always good to know how you can save money with your S Corp and the benefits of owning one, especially if you are a freelance worker and are tired of paying those self-employment taxes.
What Is a Pass-Through Entity?
The most important thing to know about an S Corp is that it is a pass-through entity. But what does that mean, really? It means any company who hires you to do work for them will pay your S Corp for that work. The S Corp can then take deductions on that money on its tax return and any profit will pass through to the shareholder (you) of the company. The S Corp does not have to pay taxes on those profits—they will be taxed on your personal return, so they are not being taxed twice.
The S Corp Can Take Business Deductions
Before the profits pass-through to you, the S Corp can take all allowable business deductions that can lower that profit and your personal tax liability. Some of the most common expenses that an S Corp can take are accounting services, advertising, supplies and tools, internet and phone, software and apps, utilities, shipping, travel, and vehicle expenses. And if you work from home, you can take all of the expenses associated with your home office as a business expense on your S Corp tax return.
You Must Pay Yourself a Salary (But That’s an Expense Too)
With an S Corp, you must pay yourself a reasonable salary and stay up to date on all monthly and quarterly payroll taxes, meaning your S Corp has to issue yourself (and any other employee) a check for every pay period, and withhold and pay those taxes for every pay period. If doing payroll sounds overwhelming to you, you can typically hire someone to do the payroll for you at a reasonable price.
No Self-Employment Tax!
If you’ve ever been self-employed, then you are probably familiar with the extra chunk of taxes you pay every year known as the self-employment tax. When you’re self-employed, you have to pay your own taxes for social security and Medicare, and it can add a lot to your overall tax liability. But since the S Corp is paying your salary and already paying into social security and Medicare for you, you do not have to pay the self-employment tax.
Tax Advantage of Contributing to Retirement
If your S Corp sets up a SEP IRA, those contributions will be tax deductible for the business. If it sets up a Simple IRA and you contribute money as an employee, those contributions are tax deductible up to a specific limit each year. The business can also deduct whatever it contributes to an employee’s Simple IRA.
Health Insurance and Other Benefits
Everyone needs health insurance, and if you set up a plan through your S Corp, you can deduct those premium payments. If you have other employees and you offer additional benefits, such as education reimbursement, you can also take that as an expense.
The Responsibility of an S Corp
While all of these ways to save money with an S Corp may sound great, there is a certain amount of responsibility that comes with being an owner and shareholder. You must keep an organized profit and loss statement if you want to deduct expenses, and you have to stay up to date on your monthly and quarterly payroll, even if you’re the only employee.
You also are expected to pay yourself a reasonable salary. What does that mean? It’s best to stick to the industry standard for your experience and position. If you choose to pay yourself a salary that is lower than the industry standard to try to reduce your taxable income, it can be a red flag for the IRS.
Having an S Corp has its advantages and can save you money, but it’s not necessarily right for everyone. If you’re interested in learning more about incorporating, give Moore & Paquette Tax Group a call today.
**Please note that tax law can change often, and the above should not be considered legal advice. Always consult with a tax preparer before completing a tax return.