What Is the S-Corp Tax Rate? Easy Guide You'll Understand
You're probably here because you've heard that S-Corps can save you money on taxes, and now you want to know what the S-Corp tax rate is. Maybe you're deciding whether to elect S-Corp status, or you already have one but don't fully understand what you're supposed to pay.
An S-Corporation is a business structure that passes income to its owners instead of paying corporate taxes. Many small business owners assume that there's a standard S-Corp tax rate they need to pay, but that's not really how it works.
S-Corps don't pay federal income tax themselves. The shareholders do, based on their individual tax brackets.
This guide explains how S-Corps get taxed and what rates you'll pay in simple language you'll understand!
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How Is an S-Corp Taxed?
S-Corps use pass-through taxation, which means that the business doesn't pay federal income tax. Instead, the profits and losses pass through to the shareholders (you!), who report them on their personal tax returns.
In other words, when your S-Corp makes $100,000 in profit, that money doesn't get taxed at the business level.
The IRS treats it as your personal income, and you pay tax based on your individual tax bracket.
You'll receive a Schedule K-1 form from your S-Corp each year that shows your share of the profits, losses, and deductions. You file this with your personal tax return, and the IRS calculates your tax based on your total income from all sources.
The business does file its own tax return (Form 1120-S), but this is informational. It shows the IRS how much income the company generated and how it got distributed among shareholders, but no tax payment comes from the S-Corp.
Learn more about small business taxes and what to expect.
What Are the Tax Advantages of S-Corp?
For many small business owners, an S-Corp is a legitimate way to reduce your tax burden, especially if your business generates solid profits.
The main advantage comes from how you can split your income between salary and distributions.
When you run your business as a sole proprietor or single-member LLC, you pay self-employment tax (15.3%) on all your business profits. S-Corps let you avoid this on part of your income.
You pay yourself a reasonable salary, which is subject to payroll taxes. Then you can take the remaining profits as distributions, which aren't subject to the 15.3% self-employment tax.
For example, if your S-Corp earns $150,000, you might pay yourself a $80,000 salary and take $70,000 as distributions. You'll pay payroll taxes only on the $80,000, which saves you about $10,710 in self-employment tax on the $70,000 distribution.
The catch is that your salary needs to be reasonable for your role and industry.
The IRS watches for S-Corp owners who pay themselves $30,000 salaries and take $200,000 in distributions. If they audit you and decide your salary was too low, they'll reclassify your distributions as wages and hit you with back taxes and penalties.
Learn more about how to pay yourself as an S-Corp.
So, What Is the S-Corp Tax Rate?
There isn't a single S-Corp tax rate because S-Corps don't pay federal income tax.
You pay tax based on your personal income tax bracket, which ranges from 10% to 37% depending on your total taxable income.
You also need to account for state income tax if your state has one. For example, California can charge up to 13.3%, but Texas and Florida charge nothing.
The salary portion of your S-Corp income also gets hit with payroll taxes, which add up to 15.3% total on your wages, though you get to deduct the employer portion when calculating your income tax.
When someone asks about the S-Corp tax rate, what they usually want to know is how much they'll pay in total. That number is your personal income tax rate plus payroll taxes on your salary portion.
Learn more about the pros and cons of an S-Corp.
What Is the Tax Rate on S-Corp Distributions?
S-Corp distributions don't have a single tax rate.
How much you pay depends on your basis in the company, which is your total investment in the business.
It goes up when you put money in, when the business makes profits, or when you loan money to the S-Corp. It goes down when you take distributions or when the business has losses.
Distributions up to your basis are tax-free.
You already paid income tax on the profits that passed through to your personal return, so the IRS doesn't tax those same profits again when you take them out.
Distributions that exceed your basis get taxed as capital gains, typically between 0% and 20% depending on your income level.
Many S-Corp owners take distributions without checking their current basis first and face unexpected tax bills, so don't make this common mistake.
Learn more about how S-Corp distributions are taxed.
FAQs
Are S-Corps Taxed at 21%?
No, the 21% rate is for C-Corporations, which pay corporate income tax at the entity level. S-Corps don't pay federal income tax, and the profits pass through to shareholders who pay based on their personal tax brackets. You might pay more or less than 21% depending on your total income.
Do S-Corps Pay Double Taxes?
No, S-Corps avoid double taxation. C-Corporations get taxed twice: once when the company pays 21% corporate tax on profits, and again when shareholders pay personal income tax on dividends. S-Corps only get taxed once at the shareholder level.
Is It Better to Be Taxed as an S-Corp or C-Corp?
S-Corps usually work better for small businesses and companies that can distribute profits to owners. You avoid double taxation and save money on the self-employment tax portion of distributions. C-Corps make more sense for businesses planning to reinvest all profits back into growth, seek venture capital funding, or eventually go public.
Does LLC or S-Corp Pay More Taxes?
An LLC and an S-Corp aren't really comparable in this way because LLC is a legal structure and S-Corp is a tax election. In fact, an LLC can choose to be taxed as an S-Corp. By default, a single-member LLC gets taxed like a sole proprietor, and a multi-member LLC gets taxed like a partnership. Both pay self-employment tax (15.3%) on all profits. If that same LLC elects S-Corp taxation, the owners can split income between salary and distributions, which can save you money on taxes.
What Is a Reasonable Salary for an S-Corp Owner?
A reasonable salary matches what you'd pay someone else to do your job in your industry and location. There isn't one specific number, but the IRS looks at factors like your responsibilities, how much time you spend working, company revenue, and comparable salaries in your field.
Get Your S-Corporation Tax Strategy
S-Corp taxation rules can be hard to make sense of on your own.
At Desi Tax Service®, we help small business owners structure their S-Corps, set reasonable salaries that satisfy IRS requirements, and maximize deductions so you can keep more of the money you earn.
Learn more about our tax services or book a consultation with our team to get started!
