C Corp

• A C-corp business structure, also known as a corporation, is considered the default incorporation structure for a business. This type of structure, which is filed at the state level, gives business owners limited liability for debts incurred by the business and is legally viewed as a separate entity. Corporations pay taxes at the corporate level, which can be anywhere from 15 to 35 percent, depending on the amount of income earned by the company.
  
  

C-Corp Taxes

• For tax purposes, the owner of a corporation is categorized as self-employed. Therefore, in addition to federal and state tax, the owner must also pay a 15.3 percent tax on any salary he receives from the corporation. A C-corp owner can avoid this tax by not paying himself a salary; however, this may result in double taxation from income and dividends. Allowing earnings to accumulate in the company up to the federally allowed limit may be more feasible.
  
  

S Corp

• When a C-corp is created, the owner may choose to file a Form 2553. This form allows the corporation to be classified by the IRS as an S-corp (in reference to the sub-chapter tax code). An S-corp offers the same benefits as a C-corp, however, any income the business generates is passed directly to its owners and can be broken up into wages or distributive shares, according to the objectives of the owner. Because of this, an S-corp owner can directly influence how much self-employment tax he pays.
  
  

S-Corp Taxes

• Imagine that a sole proprietorship and an S corp both make $90,000 in a given tax year. According to the standard self-employment tax rate, the sole proprietorship would pay approximately, $13,000 in self-employment tax (90,000 X 15.3). In contrast, the S-corp owner could choose to allocate $50,000 to the company and pay himself a salary of $40,000. This would result in the owner paying only $6,000 in self-employment tax; $7,000 less than the sole proprietor.