S Corporations Help Small Business Owners Save On Taxes

Vice Presidential candidate John Edwards saved $591,000 in taxes by forming an S corporation. Many small business owners operate as S corporations to reduce their employment taxes.

(PRWEB) October 12, 2004 -- Vice Presidential candidate John Edwards saved $591,000 in taxes by forming an S Corporation.

Edwards made $26.9 million as a trial lawyer in 1995. Edwards minimized paying Medicare taxes by forming his own S corporation. Edwards paid himself a salary of $360,000 each year for four years and had the S corporation pay him the rest in dividends.

"Salary is subject to Medicare taxation at a rate of 2.9%, but dividends escape Medicare taxation," explains Peter Hupalo, author of How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners. There is no wage base for Medicare, all wages and/or salaries are subject to the full 2.9% tax. Social Security does have a wage base, which means wages above some limit (currently $87,900) are exempt from the Social Security tax.

So, Edwards saved 2.9% of $25,460,000 or $738,000 in Medicare taxation. However, sole proprietorships are allowed to deduct one half of what they pay in Social Security taxes from their income tax. Thus, had Edwards operated as a sole proprietor, he'd get a deduction for $369,000 from his income tax. Figuring tax at a 39.6% rate, he'd reduce his income tax by about $146,124. Edwards' net savings for forming the S corporation were about $591,000.

"S corporations are useful for small business owners who want to semi-opt-out of the Social Security System. But, the law requires that S-corporation owners pay themselves a reasonable salary for the work they do," says Hupalo.

"If an entrepreneur earns $80,000 per year and can justify paying a salary of $40,000 with the remaining $40,000 paid in S-corporation dividends, Social Security and Medicare taxes are reduced by about $6,000. Over a thirty-year work history, when investing and compounding are considered, that can amount to having well over a million dollars more in retirement funds. This is a big advantage of forming an S corporation," commented Hupalo.

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