Where Did All The "S" Corporations Come From?
Reprinted with Permission from the Birmingham Medical News
You just formed your medical practice in Alabama, and you either chose a professional corporation (a "PC") or an LLC. If you went with a PC, you get to choose between an "S" corporation ("S corp") or a "C" corporation ("C corp") for federal and state tax purposes, both named after the Internal Revenue Code (the "Code") Subchapter that governs their taxation. Using an LLC provides an additional income tax option, a partnership, while still allowing you to choose S corp or C corp treatment. But which one is best for you, and why do so many tax practitioners recommend S corps in the medical world?
Avoiding C Corp Double-Taxation
Because C corps are double-taxed -- the corporation pays tax on its own income and its shareholders pay tax again when the remaining income is distributed as a dividend -- you are probably leaning toward an S corp, or, if available, maybe a partnership. Unlike C corps, S corp and partnership earnings are each only subject to one level of tax. Of course, the C corp double-tax has no real effect if the PC pays all of its profits to you or the other shareholders as employee salaries.
But then, your CPA may mention, that salary is also subject to federal and state employment taxes. But just how painful are those employment taxes and is it possible to avoid both the C corp doubletax and employment taxes at the same time?
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