{"id":1040,"date":"2013-11-06T17:18:24","date_gmt":"2013-11-06T17:18:24","guid":{"rendered":"http:\/\/vhfinancialmanagement.com\/?p=1040"},"modified":"2013-11-06T17:18:24","modified_gmt":"2013-11-06T17:18:24","slug":"the-s-corporation-and-tn-taxation","status":"publish","type":"post","link":"https:\/\/vhfinancialmanagement.com\/2013\/11\/06\/the-s-corporation-and-tn-taxation","title":{"rendered":"The S Corporation and TN Taxation"},"content":{"rendered":"
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This blog post will not touch most of you, but, for those of you it does touch, it will be very important. \u00a0As 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.<\/p>\n

More and more small business owners are establishing their businesses as S Corporations.\u00a0 This business structure has several benefits, but it also has some pitfalls that can lead to unexpected taxation.<\/p>\n

As a pass-through entity, an S Corp passes along income (and losses) to the business owner. \u00a0Generally, an S Corp doesn\u2019t pay tax at the entity level (the business) because it passes income through to the business owner where it\u2019s taxed at the personal level.<\/p>\n

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.<\/p>\n

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.\u00a0 But, a dividend payment to the business owner may generate additional taxes for Tennessee Residents.<\/p>\n

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.\u00a0 So, a simple business dividend payment could end up costing a business owner 12.5% in taxes….that\u2019s $6250.00 on the $50k example.<\/p>\n

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

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\u2019s extremely important to proactively review S Corp taxation and how it impacts the business owner\u2019s bottom line.\u00a0 Sometimes what may seem like a benefit may actually turn into a liability.<\/p>\n

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