What Is an S Corporation (S Corp)?
An S corp or S corporation is a business structure that is permitted under the tax code to pass its taxable income, credits, deductions, and losses directly to its shareholders. That gives it certain advantages over the more common C corp, The S corp is available only to small businesses with 100 or fewer shareholders, and is an alternative to the limited liability company (LLC).
Both S corps and LLCs are known as "pass-through entities" because they pay no corporate taxes but instead pay their shareholders, who are responsible for the taxes due.
Key Takeaways
- An S corporation or S corp, also known as an S subchapter, is one type of legal business structure common among small business. A limited liability company (LLC) is another.
- Requirements of an S corp give a corporation with 100 shareholdersor less the benefit of incorporation while being taxed as a partnership.
- Both S corps and LLCs are pass-through entities, meaning that they don’t pay corporate taxes, and both offer limited liability protection for their owners/principals. However, LLCs are more flexible.
- S corporation shareholders must be individuals, specific trusts and estates, or certain tax-exempt organizations. LLCs aren’t subject to the same Internal Revenue Service (IRS) rules governing the number and type of members, who are typically sole proprietors or small groups of professionals.
Understanding an S Corporation (S Corp)
S corporations get their name from Subchapter S of the Internal Revenue Code, under which they’ve elected to be taxed. The key characteristic of a corporation filed under Subchapter S: It may pass business income, losses, deductions, and credits directly to shareholders, without paying any federal corporate tax—making it something known as a pass-through entity. This gives it some special tax benefits under 2017’s Tax Cuts and Jobs Act. However, it is liable on the corporate level for taxes on specific built-in gains and passive income.
Aside from its tax status, an S corp is similar to any other corporation, or C corporation as they’re officially known. It’s a for-profit company, incorporated under and governed by the same state corporation laws. It offers similar liability protection, ownership, and management advantages as a C corporation. It must also observe internal practices and formalities: Have a board of directors, write corporate bylaws, conduct shareholders’ meetings, and keep minutes of significant company meetings.
The main difference between an S corp and a C corp is how each is taxed: Profits from a C corp are taxed to the corporation when earned, then taxed to the shareholders when distributed as dividends, creating a double tax. An S corp may pass income directly to shareholders without having to pay federal corporate taxes.
IRS Requirements for an S Corp
To qualify for S corporation status, a business has to meet certain Internal Revenue Service (IRS) requirements. It has to be incorporated domestically (within the United States), have only one class of stock, and not have more than 100 shareholders. In addition, those shareholders must meet certain eligibility requirements, which means that they must be individuals, specific trusts and estates, or certain tax-exempt organizations [501(c)(3)]. Partnerships, corporations, and nonresident aliens cannot qualify as eligible shareholders.
S corp shareholders report income, gains, and losses from the corporation on their individualtax returns, and they pay taxes at their ordinary income tax rates. Since the money comes to them free of corporate tax, they avoid double taxation on any income or earnings from the corporation.
How to Set up an S Corp
To create an S corporation, a business must first be incorporated.
It then must file Form 2553 with the IRS. Known officially as Election by a Small Business Corporation, the form states that the IRS will accept the S corp status only if the business meets all the qualifications for the status, “all shareholders have signed the consent statement, an officer has signed below, and the exact name and address of the corporation (entity) and other required form information have been provided.”
Advantages and Disadvantages of S Corporations
Advantages of Registering as an S Corp
- The big advantage is the tax benefit: not having to pay federal taxes at the entity level. Saving money on corporate taxes is beneficial, especially when a business is in its early years.
- S corp status can lower the personal income tax tab for the business owners as well. By characterizing money they receive from the business as salary or dividends, S corp owners often lower their liability for self-employment tax. The S corp status generates deductions for business expenses and wages paid to their employees.There are also tax benefits for pass-through entities that apply to S corp owners.
- S corp shareholders can be company employees, earn salaries, and receive corporate dividends that are tax free if the distribution does not exceed their stock basis. If dividends exceed a shareholder’s stock basis, the excess is taxed as capital gains—but these are taxed at a lower rate than ordinary income.
- Other advantages include being able to transfer interests or adjust property basis without facing adverse tax consequences or having to comply with complex accounting rules.
- S corporation status may help establish credibility with potential customers, employees, suppliers, and investors by showing the owner’s formal commitment to the company.
Disadvantages of Registering as an S Corp
- Because S corporations can disguise salaries as corporate distributions to avoid paying payroll taxes, the IRS scrutinizes how S corps pay their employees. An S corporation must pay reasonable salaries to shareholder-employees for services rendered before any distributions are made.
- When it comes to making those distributions to stakeholders, the S corp must allocate profits and losses based strictly on the percentage of ownership or number of shares that each individual holds.
- On rare occasions, the IRS may terminate an S corp’s Subchapter S status if an S corp either doesn’t properly allocate profits and losses or makes any other noncompliance moves, such as mistakes in an election, consent, notification, stock ownership, or filing requirement. However, a quick rectification of noncompliance errors can usually avert any adverse consequences.
- The business of setting up an S corp requires time and money. The business owner must submit articles of incorporation with the Secretary of State in the state where their company is based. The corporation must obtain a registered agent for the business and pay other fees associated with incorporating itself.
- In many states, owners pay annual report fees, a franchise tax, and other miscellaneous fees. However, the charges are typically inexpensive and may be deducted as a cost of doing business. Also, all investors receive dividend and distribution rights, regardless of whether the investors have voting rights.
- The limits on the number and nature of shareholders might prove onerous for a business that’s growing rapidly and wants to attract venture capital or institutional investors.
Pros
Tax benefits: no or lesser corporate and self-employment tax for owner, no double taxation for shareholders
Protections of incorporation: limited liability, transfer of interests
Prestige, credibility
S Corp vs. LLC
A limited liability company (LLC) is another type of legal business entity. Like the S corp, it’s a common go-to structure for small businesses.
LLCs and S corps share other characteristics as well. Both are pass-through entities, meaning that they don’t pay corporate taxes, and both offer limited liability protection for their owners/principals, meaning that the owners’ personal assets can’t be touched by business creditors, nor can they be held personally responsible in lawsuits filed against the company. As a pass-through entity, LLC owners also have tax benefits under the Tax Cuts and Jobs Act, just as S corp owners do.
However, LLCs are more flexible than S corps. They aren’t subject to the IRS regulations concerning the number and type of shareholders/owners (called “members”) or to other federal or state rules regarding governance, procedure, and distribution of funds. They can allocate their profits and losses in whatever proportions the owners desire.
Easier to establish than S corps, LLCs typically are formed by sole proprietors or small groups of professionals, like attorneys, doctors, or accountants. However, their financing options are more limited—generally, to bank loans, as opposed to equity investors. This can limit their potential for growth.
U.S. Income Tax Return for an S Corporation
Although they are largely exempt from corporate taxes, S corporations must still report their earnings to the federal government and file tax returns.
Form 1120-S is essentially an S corp’s tax return. Often accompanied by a Schedule K-1, which delineates the percentage of company shares owned by each individual shareholder, Form 1120-S reports the income, losses, dividends, and other distributions that the corporation has passed onto its shareholders.
Unlike C corps, which must file quarterly, S corps only file once a year, like individual taxpayers. Form 1120-S is simpler than tax forms for C corporations, too. The version for 2022 ran five pages.
As long as a company elects S corporation status (and the IRS has accepted that election), it must file Form 1120-S. The form is due by the 15th day of the third month after the end of its fiscal year—generally, March 15 for companies that follow a calendar year.
Like individuals, S corporations can request a six-month extension to file their tax returns. To do so, they must file Form 7004: Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns by their return’s regular due date.
Why Would You Choose an S Corporation (S Corp)?
S corporations can be the best of both worlds for a small business, combining the benefits of corporations with the tax advantages of partnerships.
Specifically, S corporations offer the limited liability protection of the corporate structure—meaning that an owner’s personal assets can’t be accessed by business creditors or legal claims against the company. But like partnerships, they don’t pay corporate taxes on any earnings and income that they generate. They can also help owners avoid self-employment tax, if their compensation is structured as a salary or a stock dividend.
What Does S Corporation Stand for?
An S corporation is named for Subchapter Sof Chapter 1 of theInternal Revenue Code (IRC). It is taxed under this provision of the IRC. S corps are also known as S subchapters.
How Does an S Corp Work?
In many ways, an S corp works as any corporation does. Operating under its home state’s corporation statutes, it establishes a board of directors and corporate officers, bylaws, and a management structure. It issues shares of company stock. Its owners cannot be held personally or financially liable for claims by creditors or against the company.
S corps are distinguished by the fact that they are not federally taxed on most of the earnings that they generate and distribute, leaving more money to pass to shareholders (who do pay taxes on the funds, at their ordinary income rates). The funds must be allocated strictly based on the shareholders’ equity stake or number of shares.
S corps must restrict their number of shareholders to 100 or less, and these must all be individuals, nonprofits, or trusts. These stockholders, along with the corporation itself, must be U.S.-based.
Come tax time, S corps must distribute the Schedule K-1 form to shareholders, indicating their annual profits or losses from the company, and file Form 1120-S with the Internal Revenue Service (IRS).
Which Is Better, a Limited Liability Company (LLC) or an S Corp?
Whether a limited liability company (LLC) or an S corp is better depends on the size and nature of the business and its aspirations for growth.
An LLC tends to be preferable for sole proprietors or enterprises with just a few partners, due to its flexibility and ease of establishment. If a business is larger—or aspires to be—then an S corp might work better. S corps have more financing options: Unlike LLCs, they are allowed to offer equity stakes to investors in return for capital, for example. And if their operations are complex, they would benefit from establishing the formal structures, compliance procedures, and other protocols required of corporations.
What Is the Difference Between an S Corp and a C Corporation (C Corp)?
One key difference between S corps and C corporations (C corps) can be expressed in one word: taxes. In a nutshell, C corps pay them and S corps don’t (mostly).
C corps pay corporate taxes on their earnings, the way individuals pay income taxes. (In the U.S., corporations are currently taxed at a flat rate of 21%.) Any dividends or other profits are then distributed to shareholders with after-tax funds. S corps, by contrast, are exempt from federal tax on most earnings—there are a few exceptions on certain capital gains and passive income—so they can distribute more gains to stockholders.
In return for this tax benefit, S corps face certain IRS-mandated restrictions. They and their shareholders must be domestically based. They can have no more than 100 shareholders, whose ranks are limited to individuals, nonprofits, trusts, and estates—no institutional investors, in other words. And they can issue only one class of stock.
C corps do not have to comply with any of these restrictions. Generally (though not always), an S corp is smaller than a C corp.
The Bottom Line
S corporations are a common type of legal entity recommended for small businesses. They carry the tax advantages of partnerships while providing the limited liability protections of corporations. Sort of a “corporate lite” structure, they are easy to establish and simpler to maintain than regular C corporations.
S corps require many of the protocols and incur many of the costs associated with regular corporations—starting with the fees and formalities associated with incorporation. They are definitely more expensive to establish and time consuming to maintain than LLCs, another popular small-business structure.
Though advantageous for fast-growing firms, they are also subject to certain restrictions on their size and shareholders by the IRS, which could eventually inhibit their expansion. The good news is that it’s relatively easy for an S corp to change to C corp status, should business conditions prove favorable to do so.
FAQs
An S corporation is a corporation that elects to be taxed as a pass-through entity. Income, losses, deductions, and credits flow through to the shareholders, partners or members. They then report these items on their personal tax return. IRS approval is required for the S election status.
What is an S corp for dummies? ›
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
How do I know if my LLC is an S corp or C Corp? ›
In summary, you are able to determine whether a business is an S corporation or a C corporation by reviewing its formation documents, income tax filings, ownership/shareholder structure, and overall tax treatment. It's vital to know the company's tax status as it will impact its tax bill and any shareholder liability.
How do I pay $800 minimum franchise tax for an S corp? ›
The California Minimum Franchise Tax of $800 will be automatically calculated for applicable corporate and S-corp returns on CA Form 100, page 2, line 23 or CA Form 100S, page 2, line 21. The amount due for the current return can be paid via the PMT screen or with voucher CA 3586-V.
Is an S corp the same as a LLC? ›
The biggest difference between S corporations and LLCs is how they are taxed. S corporations are taxed as pass-through entities, meaning that the profits and losses are passed through to the shareholders' personal tax returns, while LLCs can choose to be taxed as either a pass-through entity or a corporation.
Can a single member LLC be an S corp? ›
Both single-member LLCs and multi-member LLCs can elect to be treated by the IRS as either a C corporation or an S corporation. This election requires filing IRS Form 8832, Entity Classification Election, which must be done no later than two months and 15 days after the beginning of the LLC's tax year.
Should I pay myself as an S corp? ›
If you opt to have your business taxed as an S corp, then you're considered an employee, and you must pay yourself a salary if you are active in your business. You can draw money from the business on top of your owner's salary, but this is referred to as a shareholder distribution in an S corporation.
Why would an LLC file as an S corp? ›
The S corporation is the only business tax status that lets you save on Social Security and Medicare taxes while avoiding double taxation. An LLC taxed as an S corp offers the benefits of a corporation while also providing flexibility on income treatment.
What is the 5 year rule for S corp? ›
Once a valid S corporation election is terminated or revoked, the corporation or any successor corporation is generally prohibited from making a new election for five years. The five-year period begins with the tax year after the first tax year for which a termination or revocation is effective (IRC § 1362(g) ).
What are the 4 types of corporations? ›
There are four general types of corporations in the United States: a sole proprietorship, a Limited Liability Company (LLC), an S-Corporation (S-Corp), and a C-Corporation (C-Corp).
An LLC is a legal entity only and must choose to pay tax either as an S Corp, C Corp, Partnership, or Sole Proprietorship. Therefore, for tax purposes, an LLC can be an S Corp, so there is really no difference.
Should my LLC be taxed as an S corp? ›
Although being taxed like an S corporation is probably chosen the least often by small business owners, it is an option. For some LLCs and their owners, this can actually provide a tax savings, particularly if the LLC operates an active trade or business and the payroll taxes on the owner or owners is high.
How much do I owe in taxes for S corp? ›
All California LLCs or corporations that choose S Corp taxation must pay a 1.5% state franchise tax on their net income. This is paid by the business itself, not the LLC members or corporate shareholders.
What is the federal tax rate for S corp? ›
S corps don't pay federal corporate income taxes, so there is not really an “S corp tax rate” (although they may get taxed at the state level). Instead, the company's individual shareholders split up the income (or losses) amongst each other and report it on their own personal tax returns.
Can S corp pay owners taxes? ›
The S corporation files an information return (Form 1120S) with the IRS stating each owner's share. Business owners must pay tax on their share of the S corporation's income, even if the money stays in the business instead of being distributed.
Is it better to start as LLC or S corp? ›
As an LLC owner, you'll incur steep self employment taxes on all net earnings from your business, whereas an S corporation classification would allow you to only pay those taxes on the salary you take from your company. However, itemized deductions could make an LLC a more lucrative choice for tax purposes.
What is the 50 50 rule for S corp salary? ›
The S Corp 50/50 Rule
Profit split evenly (50/50) between salary and profit distribution is one way to avoid leaving any money on the table. For example, if an S Corp owner earns $50,000 annually, they'd pay themselves a $25,000 salary and $25,000 profit distribution.
What are the tax advantages of an S corp? ›
An S Corp pays no federal taxes. Earnings — and losses — are passed through to the owner. And because income is an S corporation allows you to avoid two-tiered taxation, paying corporate taxes, and then paying personal taxes on the same income. An S Corp pays no federal taxes.
Can you be an S corp with no employees? ›
An S corporation is able to hire employees, but employees are not a requirement. S corporations get taxed the same as partnerships and sole proprietorships. All three of these entities enjoy pass-through taxation. All profits of an S corporation get taxed on shareholders' annual individual returns.
Should I switch single member LLC to S corp? ›
From a tax perspective, it makes sense to convert an LLC into an S-Corp, when the self-employment tax exceeds the tax burden faced by the S-Corp. In general, with around $40,000 net income you should consider converting to S-Corp.
S-corp ownership is restricted largely to individuals, who must also be citizens or permanent residents of the U.S., and to certain domestic trusts, estates and tax-exempt organizations. This rules out ownership from other corporations or partnerships, which are normally permitted to buy stock in a C-corp.
At what income level is S Corp worth it? ›
So, when they understand the self-employment tax savings, the S-Corp becomes a no-brainer for them, even at a low-income tax level of $30,000 or $40,000. But for most clients, having an S Corp when a business owner has a profit of less than $50,000 doesn't make much sense.
How much salary should I take from S Corp? ›
The 60/40 rule is a simple approach that helps S corporation owners determine a reasonable salary for themselves. Using this formula, they divide their business income into two parts, with 60% designated as salary and 40% paid as shareholder distributions.
What is the disadvantage of an S Corp? ›
Disadvantages of S corporation types include legal barriers that prevent them from having more than 100 owners or having shareholders that are non-U.S. persons. S corporations are also handicapped by requirements to hold annual meetings and appoint a board of directors.
Why would a company choose to be an S corp? ›
One major advantage of an S corporation is that it provides owners limited liability protection, regardless of its tax status. Limited liability protection means that the owners' personal assets are shielded from the claims of business creditors—whether the claims arise from contracts or litigation.
When should I convert from LLC to S corp? ›
In general, you'll want to consider converting from an LLC, partnership or sole proprietorship to an S-corp when your profits are greater than the amount that you'd reasonably expect to pay in owner salaries.
What is the difference between self employed and S corp? ›
The main difference is you can save on self-employment taxes. As S corps allow profits to be dispersed through distributions, rather than income, there are no Social Security taxes or Medicare taxes taken out on them.
What is the 2% rule for S corp? ›
(A 2-percent shareholder is someone who owns more than 2 percent of the outstanding stock of the corporation or stock possessing more than 2 percent of the total combined voting power of all stock of the corporation.)
Can I leave money in my S corp at the end of the year? ›
At the end of each year, all S corporation profits are allocated to the corporation's shareholders. Even if you and your fellow shareholders choose to leave some or all of the profits in the corporation, taking nothing as distributions or salaries, you will still be required to pay tax on those profits.
How many years can you take losses on an S corp? ›
The IRS will only allow you to claim losses on your business for three out of five tax years. If you don't show that your business is starting to make a profit, then the IRS can prohibit you from claiming your business losses on your taxes.
A sole proprietorship is easy to form and gives you complete control of your business. You're automatically considered to be a sole proprietorship if you do business activities but don't register as any other kind of business.
What is the difference between a partnership and an S Corp? ›
A partnership includes at least two people who operate a company together. An S corporation is an LLC or corporation that made a taxation election, allowing the business owners to have profits and losses pass through the business to them.
How do you structure a small business? ›
How to Structure Your Business: 9 Tips For Structuring New...
- Determine Your Level Of Involvement.
- Separate Intellectual Property And The Business Itself.
- Just Structure It.
- Determine How Personal Factors Affect The Business.
- Consider Your Future Funding Needs.
- If You Need Investment, Start With A C-Corp.
Corporations, including C-Corporations and S-Corporations, do not typically receive 1099 forms for payments they receive because they are considered separate legal entities.
Does an S corp have an owner or president? ›
While S corporations don't need to specifically use the title of "president," someone must occupy that role. Many companies prefer to use CEO rather than president these days. Naming the board of directors is one of the first steps with a new corporation.
Are S corp owners considered self employed? ›
Some business owners wonder, "Am I considered self-employed if I own an S Corp?" Owners of S Corporations are "employed by" the S Corporation and receive a salary. This means that strictly speaking, you are not self-employed since you're considered an employee of the company.
What are the tax advantages of S corp vs C Corp? ›
Single layer of taxation: The main advantage of the S corp over the C corp is that an S corp does not pay a corporate-level income tax. So any distribution of income to the shareholders is only taxed at the individual level.
What is the difference between an LLC and an S corp for dummies? ›
LLCs can have an unlimited number of members; S corps can have no more than 100 shareholders (owners). Non-U.S. citizens/residents can be members of LLCs; S corps may not have non-U.S. citizens/residents as shareholders. S corporations cannot be owned by corporations, LLCs, partnerships or many trusts.
How to save money on taxes with S corp? ›
Tax advantages
The main benefit of incorporating as an S corporation over being self-employed is the tax savings on self-employment taxes (Social Security and Medicare). For each dollar of profit, it could mean as much as 14.13% in savings when it's time to pay taxes.
What are the biggest tax write offs for an S corp? ›
The Best Tax Deductions for S-Corporations: State & Local Taxes, Fees & Advice. Your local and state income taxes, excise taxes, sales taxes, and incurred use taxes can typically qualify as business expenses, which makes them tax deductible.
An S corp offers business owners three ways for paying themselves: distributions, salary, or a combo of both. Choosing which option is best has a lot to do with how you contribute to the company and how well the business does financially.
How often can you take distributions from S corp? ›
It's up to you to determine how often to pay yourself an employee salary. It might be once or twice a month, once a week, every other week or less often. If you ever need more money, you can take a shareholder distribution at any time.
Are S corp distributions tax free? ›
If a shareholder receives a non-dividend distribution from an S corporation, the distribution is tax-free to the extent it does not exceed the shareholder's stock basis. Debt basis is not considered when determining the taxability of a distribution.
How do you determine basis in S corp? ›
To track your basis, start with your initial property contributions to your S-Corporation, then adjust annually for your personal contributions and share of gross income, then for your personal distributions and share of gross losses.
Can I write off a car with my S corp? ›
S corp owners who classify as employees can't take a car tax write-off as a sole proprietor can. Instead, write a reimbursem*nt check from your S corp to your individual bank account for the business use of your personal car.
What is the best way to pay yourself as an S corp owner? ›
Factors to Consider When Paying Yourself
- Consider splitting your income through dividends and wages. ...
- Pay yourself equivalent to what others in the industry would be making for that specific work.
- Create an employment letter that will be approved by all of the S Corp shareholders.
S Corp Bonuses
The owners or shareholders of an S corporation can receive money, including loans, bonuses and proportionate distributions of the revenues earned by the business. Unlike a valid distribution that is not subject to tax withholding, a bonus is a fully taxable compensation.
What is the minimum income for an S corp? ›
Is There a Minimum Salary for S Corp? No, there is not a minimum salary for S Corp. The IRS can't require a minimum salary for self-employed workers.
What is an example of an S corp business? ›
Example of S Corporation Taxation
Let's say, XYZ Inc. is an S corporation, which is owned 60 percent by Tom and 40 percent by Harry. If it makes a net income of $10 million in a financial year, Tom will report $6 million and Harry will report $4 million as income in their personal tax returns.
At what income level is S corp worth it? ›
So, when they understand the self-employment tax savings, the S-Corp becomes a no-brainer for them, even at a low-income tax level of $30,000 or $40,000. But for most clients, having an S Corp when a business owner has a profit of less than $50,000 doesn't make much sense.
If you have just launched your LLC, you can file IRS Form 2553 within 75 days of formation to be taxed as an S-corp.
What is the maximum income for an S corp? ›
Though the Internal Revenue Service does have a number of requirements that the company must meet to make the election, there is no income limit on how much an S corporation can make and keep its election.
Can I pay myself a salary from my S corp? ›
An S corp offers business owners three ways for paying themselves: distributions, salary, or a combo of both. Choosing which option is best has a lot to do with how you contribute to the company and how well the business does financially.
Who is not eligible for S corp? ›
To qualify: Shareholders may only be individuals, certain trusts, estates, and certain exempt organizations (such as a 501(c)(3) nonprofit). Shareholders may not be partnerships or corporations. Shareholders must be US citizens or residents.
Can I have an S corp with no income? ›
Filing taxes for S corp with no income involves completing and submitting Internal Revenue Service (IRS) Form 1120S to report income, losses, and deductions realized by the business.
What are the tax benefits of an S corp? ›
Tax advantages
The main benefit of incorporating as an S corporation over being self-employed is the tax savings on self-employment taxes (Social Security and Medicare). For each dollar of profit, it could mean as much as 14.13% in savings when it's time to pay taxes.
What are the benefits of having an S corp? ›
Advantages of Registering as an S Corp
The big advantage is the tax benefit: not having to pay federal taxes at the entity level. 1 Saving money on corporate taxes is beneficial, especially when a business is in its early years. S corp status can lower the personal income tax tab for the business owners as well.
At what point should I switch to S Corp? ›
When it comes to accounting, the easiest time to switch is January 1st. Forming your S Corp at the beginning of the tax year makes record keeping and tax preparation easier because you'll need to track your S Corp finances separately from your sole proprietor finances.
When should I opt for S Corp? ›
An S corporation is often recommended when small business owners seek advice regarding how to structure their business. An LLC is also often recommended.
How much does S Corp save on taxes? ›
S-Corp election lets you split your profits into “shareholder wages” (subject to 15.3% self-employment taxes) and “distributive share” (NOT subject to 15.3% self-employment taxes). Active owners in an S-Corp must pay themselves a reasonable salary, but realize a 15.3% savings on the rest of their retained profits.
