Tax
S-Corporation (S-Corp)
A passthrough entity that allows owner-employees to split income between salary (subject to FICA) and distribution (not).
S-corp is a tax election made via Form 2553, not a separate legal entity. An LLC or corporation can elect S-corp tax treatment.
The election lets owner-employees pay themselves a 'reasonable salary' (subject to payroll tax) and take the rest as a distribution (not subject to payroll tax). For owners with profits well above a reasonable salary, this can save meaningfully on self-employment tax.
Common pitfalls
- Underpaying yourself a reasonable salary to maximize distributions — invites IRS challenge
- California's 1.5% S-corp tax (minimum $800) reduces the savings significantly for CA businesses
- Restrictive ownership rules (no foreign owners, no entity owners, single class of stock)
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