Why Small‑Business Owners Should Care
Choosing S‑Corporation status is a top strategy for cutting self‑employment tax, but many owners never see the savings—or worse, trigger IRS penalties—because of three avoidable mistakes.
1 Ignoring the Reasonable Salary Rule
The S‑Corp tax benefit works only when you pay FICA tax on wages, not on full profit. Example: $100,000 profit with a $50,000 salary can save about $7,000 in Social Security and Medicare taxes. Pay yourself the entire $100,000 as wages and you lose the break.
IRS reference → Form 1120‑S instructions: reasonable compensation
2 Skipping Payroll Tax Filings & Deposits
Once you set a salary, you must run actual payroll: withhold taxes, remit them, and file Forms 941, 940, W‑2, and W‑3 on time. Many owners write themselves “salary” checks without doing the filings—triggering late‑deposit penalties, interest, and possible trust‑fund recovery penalties.
IRS reference → Publication 15 (Employer’s Tax Guide)
3 Paying Out More Than Your Shareholder Basis
Shareholder basis = contributions + taxed profits − prior losses − prior distributions. Distribute more than that, and the excess becomes a taxable capital gain. Example: Basis $40,000, distributions $60,000 → extra $20,000 taxed as a gain. Keeping a simple basis schedule (see Form 7203) avoids unwanted surprises.
IRS references → Publication 541 (basis rules); Form 7203
Wrapping Up
A quick check of salary levels, payroll compliance, and shareholder basis can protect your S‑Corp savings. Need clarity? Maxscale Accounting in Fort Lauderdale focuses on S‑Corporation compliance and tax planning.
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