What are the benefits of forming an S corp? I was told that with an S corp net income isn’t subject to self employment tax. So you will save on Medicare and on FICA (aka Social Security tax). Is this true?

S Corp income flows through to your personal return just like a partnership. Although it's considered passive or active income it flows through to your passive income/loss schedule E, which is not subject to self employment tax.

The tricky part here is that, as an S Corp. you are expected to pay yourself a REASONABLE salary, which is subject to self employment tax. The IRS watches for this carefully because many sole proprietors use this as a way to avoid taxation. What is "reasonable" - well, that's up for you to decide.

Anyway, if you are a sole proprietor, the reduction of self employment tax is probably not a good reason for you to become an S Corp. It is like talking out of the other side of... ya know? But if you do decide to do it, just remember that you are required to pay yourself a "reasonable salary".

There is additional analyis that must be done here to fully understand the benefits and/or drawbacks but you will probably need to hire a professional to get that level of analysis.

Hope this helps! :)

CBMB has it right again.

I had to perform comparisons with similar companies in the Atlanta area several years ago for a client who ran a S corporation to determine the appropriate level of his salary.

If you do set up a Subchapter-S corporation, you will have to get professional tax help to file the Form 1120S and probably will have to hire a competent bookkeeper.

AtlantaTaxExpert makes a good point about the bookkeeper. Competent ones are hard to find!

What are the benefits of forming an S corp? I was told that with an S corp net income isn’t subject to self employment tax. So you will save on Medicare and on FICA (aka Social Security tax). Is this true?
I own a small company and held it as a limited liability companyfor several years. I changed over to an S Corp. I am the one and only employee (owner). I hate filing the quarterly reports, and I hate paying someone else to do my income tax at the end of the year. You still pay some social security and medicare based on an acceptable income. All and all, I am glad that I am now an S Corp and it has saved me money.

Always listen to the man with FIRST-HAND experience!