S corporations are known as S subchapter organizations according to the IRS tax code. These meet every requirement specified by the Internal Revenue Service. In many cases, organizing a business this way can reduce outgoing tax liabilities.
C corporations are the most common type of business structure, but S corps offer a few advantages. Here is what everyone should know about S corp registration if they are self-employed.
What Are Self-Employment Taxes and How Are They Calculated?
Freelancers and individual business owners must register and pay self-employment tax. Whether you are a small-business owner or an independent contractor, this is required. Typically, someone will pay 15.3% of their net earnings for this tax, including 12.4% for Social Security and 2.9% for Medicare.
Traditional W2 jobs allow these expenses to be split between employees and employers. Nevertheless, self-employed earners must foot the entire bill whenever they are filing taxes.
Generally, 92.35% of overall net earnings are subject to this type of taxation. However, taxpayers can deduct business-related expenses from their gross revenue first. Consequently, their total tax liability can be reduced substantially, lowering what they owe.
If somebody earns more than $400 from a personally owned business, self-employment taxes are a requirement. Even if you do not own the business, 1099 payments require similar registrations. Furthermore, if you received compensation exceeding $108.28 from church employment, you will pay them.
What Is an S Corp and How Do They Benefit the Self-Employed
An S corporation may pass earnings directly from the business to its shareholders. In addition to earning distribution, this structure also alters credit and deduction allocation. As a result, federal corporate taxes may be bypassed, reducing owed taxes.
As a small-business owner, you may benefit from incorporation while still enjoying tax exemptions. Usually, these exemptions only apply to partnerships, but S corps can utilize them. Since these are pass-through entities, they do not pay corporate taxes and receive limited liability protection.
To qualify as an S corp, the entity must meet certain requirements. For example, it must complete domestic registration processes. Moreover, eligibility requirements impose strict specifications on anyone seeking registration. You must file Form 2553 with the IRS to establish and authorize an S corp.
On the other hand, registering your business using this structure confers many benefits. This can be particularly helpful during the early years of owning a business. The business’s corporate tax obligations are frequently reduced following incorporation.
Plus, structuring a business like this can minimize personal tax payments. If you characterize money received from the business as salary, it lowers self-employment tax liability. Additionally, this status generates deductions for business expenses and wages paid to employees.
Comparing an S Corp vs an LLC
Limited liability corporations are another common way to form a company. Independent owners often select this path because of its particular advantages. LLCs possess benefits that are similar to what is conferred by S-corp registration. Both formats qualify as pass-through entities, minimizing corporate tax obligations. Moreover, both protect the owner’s assets from business creditors.
If a lawsuit is filed against the company, ownership is not at risk. Regardless, LLCs may be considered the more flexible option in certain circumstances. Since they are not subject to shareholder limitations, LLCs can expand more than S corps. Likewise, S corps may not disburse funds as freely as LLCs, as the IRS imposes restrictions on them.
What Are the Drawbacks of S Corp Registration
Despite plentiful benefits, S corps may not fit everyone’s needs. They impose strict limits on who can become the business’s owner. Although S corps facilitate income distribution, the IRS may scrutinize your filings more. If they discover a distribution is not equitable, an audit may be requested.
On rare occasions, a company will not obtain the requirements when registering. As a consequence, the IRS may make them forfeit their classification upon review. Luckily, these situations are uncommon, so they should not be a massive hurdle. LLCs can be beneficial if your company has greater than 100 shareholders.
Registering an S Corp as a Self-Employed Taxpayer
S corporations are special legal entities that possess ample tax advantages. Registering as one may lessen your yearly tax outlays and boost profit if you run a small business.