Stockholders or LLC Members who elect S-Corporation Tax Status, consent to the IRS to pay the income tax due as stockholders or members rather than paying the Tax at the "corporate level". This is a "trade off" that is agreeable to the IRS because it believes the tax will be easier to collect and it is agreeable to stockholders because of expected tax savings verses taxes paid as a Sole Proprietor.

A Sole Proprietor files taxes on schedule C on a personal tax return, where all earnings (after expenses) are subject to Self Employment Tax. An S-Corporation stockholder receives a W-2 for a "reasonable" salary and a K1 for the balance of the net corporate income or stockholder distributions. The K1 earnings are filed on Schedule E (not C) and are not subject to self employment tax as they are considered "investment income".

As shown above the Tax savings can be substancial if an S-Corporation is operated as a primary source of income. Many of our clients operate Internet, Technology, Consulting or Service businesses as Nevada S-Corporations, privately, without involving their home State's Tax agencies in the corporate matters.