S Corporation
Definition
A corporation that elects pass-through tax treatment under Subchapter S of the Internal Revenue Code. S corps avoid double taxation by passing income, losses, deductions, and credits through to shareholders' personal tax returns. Owner-employees must pay themselves a "reasonable salary" subject to payroll taxes, but remaining profits distributed as dividends are not subject to self-employment tax. S corps are limited to 100 shareholders and can only issue one class of stock.
Example
Your S corp earns $150,000 in profit. You pay yourself a $80,000 salary (subject to payroll taxes). The remaining $70,000 passes through as a distribution, saving you approximately $10,710 in self-employment taxes compared to a sole proprietorship.
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