The document provides an overview of S-Corporations, explaining that they allow business owners to split business proceeds into a salary and income portion in order to pay employment taxes only on the salary and avoid self-employment taxes on the income portion. It notes the setup requirements to form an S-Corp and quarterly/annual maintenance requirements, and compares the employment tax savings of an S-Corp to a sole proprietorship.

1. S-Corporations:
Overview and FAQs
Presented by:
Edward C. Forker, EA
Forker & Associates/ Tax Solvers
1 Eves Drive Marlton, NJ 08053
www.TaxSolvers.net

2. “You must pay taxes.
But there’s no law that says
you gotta leave a tip.”
Morgan Stanley

3. Proprietorship: Step 1
Report net
income on
Schedule C

4. Proprietorship: Step 2
Report net Pay income
income on tax on net
Schedule C income

5. Proprietorship: Step 3
Report net Pay income
income on tax on net
Schedule C income
Pay SE tax up
to 15.3% on
income

6. Self-Employment Tax Example
Report net Pay income
income on tax on net
Schedule C income
Self-Employment Tax
Income $80,000
Pay SE tax up SE Tax $11,304
to 15.3% on
income Net $68,696

7. S-Corp: Step 1
Split proceeds
into “salary”
and “income”
Salary Income

8. S-Corp: Step 2
Split proceeds Pay income
into “salary” tax on salary
and “income” and income
Salary Income

9. S-Corp: Step 3
Split proceeds Pay income
into “salary” tax on salary
and “income” and income
Salary Income
Pay FICA up to
15.3% on salary

10. S-Corp: Step 4
Split proceeds Pay income
into “salary” tax on salary
and “income” and income
Salary Income
Pay FICA up to Avoid FICA/SE
15.3% on salary tax on income

11. S-Corp FICA Tax Example
Split proceeds Pay income
into “salary” tax on salary
and “income” and income
Salary
FICA Tax
Salary $40,000
Pay FICA up to FICA $6,120
15.3% on salary Net $73,880

12. Employment Tax Comparison
S-Corp FICA Proprietorship SE
Salary $40,000 Income $80,000
FICA $6,120 SE Tax $11,304
Net $73,880 Net $68,696
S-Corp Saves
$5,184

13. “Reasonable” Salary
Source: IRS Statistics of Income data, 2001

14. What About Audit Odds?
S-Corp 0.38%
Schedule C: $100,000+ 3.90%
Schedule C: $25,000-99,999 3.09%
Schedule C: $0-24,999 3.78%
Source: IRS Data Book, 2007

15. What About Social Security?
1. Calculate “indexed earnings” for all years
2. Add “indexed earnings” from top 35 years
3. Calculate “average indexed monthly earnings”
4. Apply formula to AIME
“Average Indexed Monthly Earnings” Benefit
$0 - 711 90%
$712 – 4,288 32%
$4,288+ 15%
Figures assume worker born in 1946 and normal retirement age.

16. What About Social Security?
After “average indexed monthly earnings” tops $4,288,
additional employment tax adds little to final benefit.

17. Social Security Example
2: Pay FICA Tax on
1: Pay SE Tax on $96,000
$48,000
Starting AIME $4,000 Starting AIME $4,000
AIME: last 10 Yrs $8,000 AIME: last 10 Yrs $4,000
Final AIME $5,143 Final AIME $4,000
Final Benefit $1,912 Final Benefit $1,692
SE Tax Paid $135,644 FICA Paid $73,440
SE Tax Savings $62,204
10-yr “Side Fund” $97,315
Scenario assumes you invest $6,220 /yr tax
savings at 8%, tax-deferred, for 10 years.

18. Setup Requirements
1. Pre-Incorporation
2. File Articles with state
3. Obtain EIN
4. File S-Corp Election

19. Quarterly Maintenance
• Form 941 (Federal withholding)
• State Withholding
• State Unemployment
• State Workers’ Comp premiums
• Estimated taxes

20. Annual Maintenance
• Forms W-2 & W-3
• Form 940 (Federal unemployment)
• Form1120S + State Return
• Corporate Formalities