Question

The aggregate ordinary income allocated to shareholders of an S Corporation, even those who are actively involved in the management of the corporation, are not subject to payroll or self-employment tax. Only wages and officers compensation are subject to payroll taxes. This is a significant benefit as compared to partnerships. Compare these distributions to a regular C corporation distribution.

Answer 1

For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. C corporations conduct business, realize net income or losses, pay taxes, and distribute profits to shareholders. C corporation profits are taxed to the corporation when earned, and then taxed to the shareholders when distributed as dividends. This creates a double tax. There are, however, several alternative methods that allow you to withdraw cash from a corporation while avoiding dividend treatment:

• Repayment and interest on debt
• Compensation for services
• Loans from the corporation
• Fringe benifits like life insurance, certain medical benefits, disability insurance, dependent care
• Sales to the corporation.