S Corp Fees: Everything You Need to Know
S corp fees refer to fees that are incurred when a corporation becomes an S corporation. 3 min read
2. Classifying Income as a Distribution
3. Risks of Electing S Corp Status
4. Additional Costs for an S Corporation
5. Choosing Between an S Corp and a Limited Liability Company (LLC)
6. How To Apply for S Corp Status
Updated November 16, 2020:
S corp fees refer to fees that are incurred when a corporation becomes an S corporation. S corp is a tax status that some corporations use to avoid paying corporate taxes on their incomes. It passes items of income, loss, credits, and deductions through to the shareholders, who will then report them on their individual tax returns.
While an S corporation offers some financial benefits, it also comes with additional risks and costs.
Using S Corp to Reduce Self-Employment Taxes
As a self-employed person, you'll most likely be paying more taxes on Social Security and Medicare, which are also called self-employment taxes. One thing you can do to lower these taxes is to elect S corporation status.
Classifying Income as a Distribution
If you choose to turn your business into an S corp, you'll be able to classify a portion of your earnings as salary and a portion as a distribution. You'll still be required to pay self-employment taxes on your salary, but you'll only have to pay regular income taxes on the distribution portion. By classifying a larger portion of your income as a distribution, you'll be able to save substantially on self-employment taxes.
As a shareholder in an S corporation, net profit or loss will be passed through to your personal tax returns, where it will avoid payroll taxes and be subject to income taxes only. If your S corp is profitable, such savings may be enough to pay for organizational expenses, maintenance, and tax returns, as well as provide extra tax savings.
Risks of Electing S Corp Status
One of the disadvantages of an S corporation is that it may get extra scrutiny from the IRS, because of the great potential for abuse. For instance, if you earn half a million dollars a year but only assign $20,000 of your earnings as salary, you may trigger an inquiry from the IRS, because you are avoiding self-employment tax.
As such, it is important that you designate a reasonable portion of your earnings as a salary. While it is difficult to determine the right amount to designate, you have to know that pushing the envelope too far can result in an IRS audit or penalties.
Additional Costs for an S Corporation
Although attaining S corp status can help reduce your self-employment taxes, it may also be costlier overall. Similar to a large corporation, an S corporation has both initial and ongoing accounting and legal costs. In addition, some states require S corporations to pay extra fees and taxes. For instance, an S corp in California has to pay a 1.5-percent tax on its earnings, with a minimum amount of $800 a year. A sole proprietor does not have to pay this tax.
Choosing Between an S Corp and a Limited Liability Company (LLC)
One of the main advantages of becoming an S corporation or LLC is that both of them will keep your personal assets safe from creditors. Also, they make it possible for you to avoid paying corporate and personal taxes. However, an S corp differs from an LLC in that its owners pay themselves salaries and get dividends from their profits. An LLC, on the other hand, is a “pass-through” entity, meaning that all its earnings and expenses will be reported on its operator's personal income tax returns.
Both S corp and LLC are entitled to tax deductions for pre-tax expenses such as:
- healthcare premiums
- travel expenses
- car expenses
- phone bills
How To Apply for S Corp Status
The procedure for filing for S corporation status may vary from one state to another. If your business is located in California, you need to follow these steps.
- Register with California's State of Secretary.
- Select a name for your S corporation, with the inclusion of a suffix such as “Inc.”
- Appoint a minimum of three directors if your corporation has three or more shareholders.
- Appoint a registered agent to represent you in official communications.
- Draft the Articles of Incorporation.
- Submit the Articles of Incorporation to the Secretary of State and pay a filing fee of $100.
- Submit Form 2553 to the IRS to file for S corp tax status.
If you need help with S corp fees, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.