The S Corporation and TN Taxation

This blog post will not touch most of you, but, for those of you it does touch, it will be very important.  As a fee-only advisor, I work with many different types of business owners, and today’s post is meant for those who own S Corporations.

More and more small business owners are establishing their businesses as S Corporations.  This business structure has several benefits, but it also has some pitfalls that can lead to unexpected taxation.

As a pass-through entity, an S Corp passes along income (and losses) to the business owner.  Generally, an S Corp doesn’t pay tax at the entity level (the business) because it passes income through to the business owner where it’s taxed at the personal level.

There are two ways an S Corp business owner can pay himself: either as a shareholder distribution (considered a dividend) or through payroll as an employee.

One of the benefits of an S Corp is income that is passed through to the business owner in the form of a shareholder distribution (dividend) will avoid payroll taxes. For example, a business owner who pays himself a $50k payment (considered a dividend) from business profits can avoid payroll taxes on this payment, which may generate several thousand dollars in savings.  But, a dividend payment to the business owner may generate additional taxes for Tennessee Residents.

This dividend payment may factor into Franchise and Excise taxes, as well as, the TN Hall tax (income tax), which are levied at the rate of 6.5% and 6% respectively.  So, a simple business dividend payment could end up costing a business owner 12.5% in taxes….that’s $6250.00 on the $50k example.

Most often in this situation it may make more sense for the business owner to simply pay themselves through payroll as an employee.

While there are several nuances to S Corp taxation and this is by no means a total pros and cons comparison, it simply illustrates the complexities of an S Corp. It’s extremely important to proactively review S Corp taxation and how it impacts the business owner’s bottom line.  Sometimes what may seem like a benefit may actually turn into a liability.

Related Posts Plugin for WordPress, Blogger...
This entry was posted in Fee-Only Financial Planning, Taxes. Bookmark the permalink.

2 Responses to The S Corporation and TN Taxation

  1. Once you made the decision to relocate, prepare, arrange and
    analyze it via correct signifies. Everyone wants to get free of these boring tasks of relocation. Now you need to look for companies that include as many services as you need to make your
    move completed.

    my web page … storage units in northwest tucson az

  2. Susan says:

    Hello, I started a home cleaning service in TN last year as a sole proprietor. I am now hiring employees and want to change to either an LLC or an S-Corp. I’m not sure which to do because of the TN taxation on an S-Corp. Which entity would be the smartest way for me to proceed at this stage of business? Thanks , Susan

Leave a Reply

Your email address will not be published. Required fields are marked *