S Corps

[wayne menke <wdmenke -at- WORLDNET -dot- ATT -dot- NET>]

While the answers from Mike Uhl and Laurel Nelson about S corporations
were both correct, Laurel's was more accurate because it went into
greater detail.

All revenues (less expenses) are taxed in an S corporation. Everything
flows through to the individual's tax return. Whatever is taken out in
salary is taxed just like any employee. Federal, state and local taxes
are deducted. This includes 7.65% in FICA (Federal Insurance
Contribution Act) taxes (6.2% for social security, and 1.45% for
medicare). A matching 7.65% is also paid by the S corp.

If anything is left over after salary and other expenses, it is also
taxable to the individual. This amount goes on a separate line of the
1040 return, where partnerships, trusts, real estate, etc. is reported.
However, because it hasn't been taken out as salary, there is no FICA
tax due. This profit can be left in the corporation, or taken out as a
distribution (or "dividend"). No FICA tax would be due on this
distribution, either from the employee or the corporation.

What the IRS looks for is a "reasonable" salary for the type of work
done. If someone working as a sole employee for an S corp earned
$100,000 after expenses, and took a $40,000 salary and a $60,000
distribution, the IRS might want to take a closer look. On the other
hand, if an S corp owner with 20 employees had revenues of $2,000,000,
and took a salary of $100,000, leaving $150,000 in the corporation, it
could probably be justified.

Remember that social security contributions in 1999 stop after $72,600
(it was $68,400 for 1998). Below this figure, the savings would be 15.3%
(FICA from the individual and the corporation). Above this threshold, it
drops to 2.9% (both halves of medicare). There is no limit on the
medicare contribution.

States can treat S corps in different ways. Here in New Jersey, the
state at one time did not recognize this form of corporation. If you
were incorporated, you were treated as a full C corporation. Now NJ
recognizes S corps, and taxes them. Florida, on the other hand,
recognizes S corps, but does not tax them (which makes sense, because
there is no personal income tax in that state).

Wayne Menke
Mendem Concord, Inc.

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