# What is S-Corporation?

Country: United States

An S-corporation is a US entity that elects pass-through taxation under Subchapter S. The corporation itself pays no federal income tax; profits flow to shareholders' personal returns. Limited to 100 shareholders, all US individuals (or certain trusts), and one class of stock. Owner-employees must pay 'reasonable compensation' as W-2 wages subject to FICA.

## Current rate (Generally calendar year (fiscal year requires IRS approval))

Pass-through (owner pays personal income tax + FICA on W-2 portion)

## Example

Acme Consulting Inc. (S-corp) earns $200,000 profit. The owner takes $80,000 W-2 salary (subject to FICA 7.65% employee + 7.65% employer = $12,240 FICA + income tax). Remaining $120,000 flows through as K-1 distribution, subject to income tax but NOT FICA. Tax saving vs. sole prop: ~$18,000.

## How S-Corporation works in United States

S-corp election (Form 2553) is the most common tax strategy for profitable owner-managed businesses earning $80k+ annually. The election converts a portion of profit from SE-tax-bearing self-employment income into K-1 distributions exempt from FICA.

IRS requires shareholder-employees to receive 'reasonable compensation': what someone would be paid for the same role at arm's length, before taking the rest as distributions. Under-paying salary to dodge FICA is the #1 S-corp audit issue.

Source: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

## Related terms

- [C-Corporation](https://accounts-os.com/us/glossary/c-corp)
- [LLC (Limited Liability Company)](https://accounts-os.com/us/glossary/llc-us)