If you are a small business owner who needs to know how to structure their business then it is recommended that you should switch to an S corporation. There are several benefits if your business becomes an S corporation. Some of the benefits are as follows – The first and the foremost benefit is that of tax savings on self-employment. The pivotal benefit of making your company S corporation over being self-employed is the tax benefits or savings on self-employment taxes i.e. your social security and Medicare. For every dollar that you profit it would mean a tax savings of 14.13%. It is important that you pay a reasonable salary to the employees or the shareholders. And, the reasonable salary is likely to reduce the profits, but any profit that remains after deduction of a reasonable salary including other tax deductions will not be subject to tax for self-employed.
Tax Savings on Health Insurance –
You can also consult a tax specialist in this regard. Once you determine a reasonable salary, you can begin with a regular or normal payroll. You should also think about setting up wave payroll as it will help you to handle your team including your taxes more efficaciously and it will keep you prepared at the time of the taxation or tax season. Tax savings on health insurance is another benefit that you can avail yourself of if you turn your company into an S corporation. Most of the S corporation employees and shareholders save additional payroll tax by making their S corporation pay for their health insurance coverage of the family. As long as it is included as a part of their wages, their spouse is not eligible for tax coverage under a subsidized health insurance plan. This is one of the advantages of incorporation.
Out of Pocket Expenses No Deduction –
Another benefit that you will see is that the premiums included in the wages are exempted from employment taxes. You can also go through FUTA and Social Security or Medicare guidelines. It means that premiums would be considered as self-employed health insurance. Therefore, it is deductible on employees’ or shareholders’ personal income tax returns, which will, in turn, do the income tax savings. Under an accountable plan, the employee expense deduction is another benefit of incorporation. As per the present tax laws, the out-of-pocket business expenses on personal returns can no longer be deducted. So, one of the options that employees have is not to spend their money and get reimbursement from the corporation.
List of Correct Expenses is Important –
In an S-corporation with employees and shareholders, the employees can pay the money or expenses out of their pocket and get it returned by the S-Corp. Such type of expenses comprises of the car mileage cost or transportation cost, office rent, mobile phone and internet plans and much more. In addition, for all kinds of reimbursement, which the S corporation does, they have to create an Accountable Plan. It is also important people submit the correct expenses with the S corporation, as submitting a wrong expense could be like a red flag with the Internal Revenue Service Department.
