Overview
S-Corporation election allows business owners to split income between salary (subject to payroll taxes) and distributions (not subject to payroll taxes), reducing self-employment tax burden.
Qualified Business Income (QBI) deduction provides additional 20% deduction on qualified business income, further reducing effective tax rate for eligible businesses.
Requirements
Sufficient Net Income
Business net income typically exceeding $60K-$80K annually to justify S-Corp compliance costs and reasonable compensation requirements.
Reasonable Compensation
Owner-employee must receive reasonable salary for services performed. IRS scrutinizes compensation that appears artificially low.
Eligible Business Structure
Operating business eligible for S-Corporation status. Certain business types or ownership structures may be ineligible.
Tax Benefits
Example: Business with $200K net income. Owner takes $120K salary, $80K distribution. Saves approximately $12K in payroll taxes (15.3% on $80K distribution).
QBI deduction provides additional 20% deduction on qualified business income (subject to limitations for specified service businesses above income thresholds).
Combined benefit of payroll tax savings and QBI deduction can reduce effective tax rate by 5-10 percentage points for eligible businesses.
Implementation
S-Corp Election
File Form 2553 with IRS to elect S-Corporation status. Election must be timely filed (typically by March 15 for calendar-year corporations).
Reasonable Compensation Analysis
Determine reasonable salary based on industry standards, owner responsibilities, and business revenue. Document salary determination methodology.
Payroll Setup
Establish payroll system for owner-employee salary. File quarterly payroll tax returns and issue W-2 annually. Coordinate with CPA for proper tax reporting.
Important Considerations
Reasonable compensation must be defensible upon audit. Artificially low salaries may be recharacterized by IRS, resulting in additional payroll taxes, penalties, and interest.
QBI deduction subject to phase-out for specified service trade or business (SSTB) above income thresholds ($182,100 single / $364,200 married filing jointly for 2023).
S-Corporation compliance requires additional filings, separate tax return, and ongoing administrative costs. Cost-benefit analysis required before election.
Coordinate with your CPA to determine optimal salary/distribution split and evaluate QBI deduction eligibility for your specific business and income level.
Discuss Implementation
Contact us to evaluate S-Corp election and QBI optimization for your business.