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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10121
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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This question is, JD. It is related to a question I asked a

Customer Question

This question is for Lane, JD. It is related to a question I asked a couple months ago. Some months ago I asked a question about a new forming corporation taking in earlier businesses from a couple and doing an S Corp election. I thought, after reading
your response, that this couple, who had started a couple of businesses, could elect s S-corp status as of the beginning of 2015 by doing a 2553 S corp election at end of year. However, the problem is /was they were simply two people with a couple businesses,
but these were small SE type businesses, and they had never incorporated or applied for LLC status. Indeed they had just started business in 2015. They just incorporated in December, and I am sending off an S corp election that I wanted to elect as of beginning
of year. This was my intent when I asked you the original question. I am concerned I may have misunderstood your answer. I wanted to apply for S corp as of beginning of year. But at beginning of year they were two individuals starting up small businesses.
My idea was to incorporate them, elect S back to start of year, and have them do the final payroll in Dec that paid them a reasonable salary for year, but gave the rest of their income as s corp to them as dividend. I suspect that this is impossible, and that
they were not eligible entity to do s-corp election until they incorporated, and that I thus cannot save them SE tax by doing what I was planning. if they incorporated Dec 1, and were simply a business prior to that, is there any way to legally pay them a
salary for the year and shield dividend income from SE tax???? This is a bit of a mess. And I looks like I ,misunderstood your answer. So I am trying to clarify it now.
Submitted: 11 months ago.
Category: Tax
Expert:  Lane replied 11 months ago.

Hi,

...

Yes, the S-Corp election can only be made if the company is already (1) an LLC or (2) a regular corporation, sometimes referred to as a C-Corp.

...

A sole proprietorship (one person owner) or partnership (more than one person owner) ... the default ... (what a company is considered if the company does not set up an entity with secretary of state as a corporation or LLC) can't move to elect S-Corp taxation (by filing the 2553) UNTIL they have first established the LLC or corporation with the secretary of state.

...

Also, it's important to understand that the salary doesn't really shield them from self-employment tax.

...

The S-Corp shareholder/employee pays the employee half of Social Security and Medicare by withholding 1/2 of the SS & Medicare from wages (and paying-in at least monthly) and then the S-Corp (the same Shareholder/employee) pays the other half.

...

It;s only on that portion of profits ABOVE the salary and other operating expenses (that's passed to the shareholder/employee on the K-1) that escapes SS & Medicare tax.

...

Until they become profitable WELL above that does the savings on the 15.3% (especially with the additional cost to administer the payroll taxes) that the S-Corp begins actually to save money on taxes... an again that''s ONLY on the profits over and above the salary and other expenses of the S-Corp

...

Hope this helps to clarify

...

Lane

..

Expert:  Lane replied 11 months ago.

Did you see my answer?