Zhen Shen
Tax 635
Prof. Biagio Pilato

S Corp Is Becoming Less Favorable among Small Businesses

S Corps continue to be the most prevalent type of corporation. According to the IRS’s most recent data, about 70% percent of all corporations filed as an S Corp. Some are regular corporations electing S Corp status and some are LLCs, checking the box for corporate taxation and then electing S Corp status. However, the S Corps status is losing its attractiveness to LLCs and even C Corps due to reasons from both government side and the corporation side.
One benefit for a small business to elect as an S Corp but not an LLC is that the S corporations may have preferable self-employment taxes compared to the LLC because the owner can be treated as an employee and paid a reasonable salary. FICA taxes are withheld and paid on that amount. Corporate earnings after payment of the salary may be able to be treated as unearned income that is not subject to self-employment taxes. In 2015, employers must withhold 7.65% of the first $118,500 of an employee's pay for Social Security and Medicare taxes, and 1.45% of earnings above that amount for Medicare taxes alone. The employer adds an equal amount and sends these funds to the IRS. The IRS collects a similar 15.3% tax on the first $118,500 earned by a self-employed person and a 2.9% tax on earnings above that amount. This is the self-employment tax. For an S corporation, the rules on the self-employment tax are well established: as an S corporation shareholder, you pay the self-employment tax on money you receive as compensation for services, but not on profits that automatically pass through to you as a shareholder. For example, if a shareholder’s share of an S corporation’s income is $100,000 and he performs services for the corporation reasonably worth $65,000, he will owe the 15.3% self-employment tax on the $65,000 but