What is an S Corporation and Why Should I Elect To Be One?

Why S Corporation

This is Part 3 in a series of ours. If you have not read our previous articles do that first:

What is a Pass Through Entity?

What is an LLC and How Is It Different From An S Corporation?

In this article we are going to talk about what an S Corporation is and why you may want to elect to be taxed as one.

1. What is an S Corporation?

An S Corp is a way to be taxed. It is not a entity type at the state level. In order to be an S Corporation your business must be an LLC or Corporation. You then elect for that business to be taxed as an S Corp.

This is important, in order be an S Corp you need to have an entity structure already setup. If you are operating as a Sole Proprietor you would not be able to elect S Corp status, you would first need to open an LLC or Corporation.

If you elect to be taxed as an S Corp it does not change your entity structure at the state level. If you are an LLC and elect to be taxed as an S Corp you remain an LLC with your state, nothing changes on the entity setup level.

2. Where do I report activity from a S Corporation?

As discussed in our previous article a S Corp is considered a pass through entity. You report the business activity on a business tax return (Form 1120S) which would include a K1 that you use to bring it to your personal return.

Note: As a Single Member LLC you simply file your business activity on your personal tax return (1040) via a Schedule C but with an S Corporation you are required to file a separate business tax return which will then flow to through your personal return.

3. Payroll Requirement for S Corporations

The IRS requires owners of an S Corporation to take a “reasonable salary”. This means you will be an actual W2 employee of your business. If you have other employees this is not a huge deal but if you are a solo business owner you will need to implement a payroll service to help make sure this is done quickly and easily. We recommend Gusto for a painless payroll experience.

4. How is a S Corporation taxed?

As a S Corporation there is no federal income tax at the corporate level instead your pay taxes on the business income on your personal tax return. You will pay your normal income tax rate on the income from the S Corporation and you will pay “self employment taxes” on your salary from the S Corp.

Regular Income Tax Rate: This would be your normal rate that you pay on all ordinary income including a W2 from an employer.

Payroll “Self Employment Tax”: With an S Corp you pay self employment taxes on the payroll you take as an employee. They do not call it self employment tax directly but that is essentially what it is because you pay social security and medicare taxes as both an employee and then you as an employer matches it.

If we compare this to a Sole Prop or SMLLC you can see the advantage is that instead of paying self employment taxes on 100% of your income, you only pay it on the payroll portion but any other earnings from the business are just taxed at your normal income tax rate.

Essentially you split your business income into two: Payroll and Dividends (or owners draw)

Lets put this in an illustration:

S Corporation Tax Setup

5. Let’s see an example!

Everything makes more sense when you put some numbers to it. So lets look at an example. In this example we are using business profit of $80,000 and we are assuming a reasonable salary would be $36,000.

Sole Prop/SM LLC vs S Corporation

In this example with $80k of business profit if you were setup as a SMLLC you would pay $11,304 in self employment taxes, again this is in addition to your normal income tax rate.

However, with an S Corporation we are only paying self employment taxes on our payroll of $36k which would be $5,508. The remaining $44k from our profit would not be subject to self employment taxes, leading to tax savings of $5,796.

Note: The remaining $44k you would pay your normal income tax rate on and take (if you wish) as a dividend simply by transferring the funds (or writing a check) from the business account to your personal account.

This self employment tax savings is one of the main reasons we look to an S Corp for small business owners.

6. When does it make sense to elect to be taxed as an S Corporation?

An S Corporation is not right for everyone. Typically we say if your business profit is roughly $40k or more the S Corporation could make sense for you. The reason we set this threshold is because there are some added costs to an S Corp (which we discuss below), that will eat into your tax savings if below this amount.

We would never advise someone to rush into an S Corp if the additional costs to maintain it will wipe out the savings.

Note: Some cities and states (New York City, Tennessee, etc) are not friendly to S Corporations, so double check an S Corp makes sense in your specific situation prior to making any changes. There are also some requirements that need to be met in order to elect S Corp status which we will discuss in a future article about setting up the S Corp.

7. What are the downfalls to being an S Corporation?

As mentioned above if you are not profiting $40k+ some of the costs of an S Corp could eat up your tax savings. Here are the two main downfalls of an S Corporation:

  • Separate Business Tax Return is Required: Unlike a Sole Prop or SMLLC which are simply filed on your personal tax return via a Schedule C, with an S Corp you have to file a separate S Corp Business Tax Return on Form 1120S. This tax return is more complicated than a Schedule C and thus costs more to prepare. Fortunately, all of our packages includes the S Corp tax return in them.
  • Payroll (Reasonable Salary) is Required: If you already have employees adding another one (yourself) is not a big deal. However if you do not currently have employees you would need to setup a payroll system so you can properly withhold taxes, file payroll tax returns, and pay the respective taxes to the government agencies. This brings a hard cost which typically ranges from $50-$120 per month.

Assuming you live in an S Corp friendly city and state (most are) these would be the only main downfalls.

Another nice feature of the S Corp is that the audit rates are significantly less compared to a Schedule C filing.

In our next articles we are going to discuss what a “reasonable salary” means and how you can go about electing S Corp status for your business.

If you don’t have a tax advisor, consult with one prior to make this change to ensure it makes sense for you and your business. Click here to book your complimentary strategy session with JETRO.

What Is An LLC and How Is It Different From An S Corporation?

Sole Prop/LLC vs S Corporation

If you have not already read our article “What is a Pass Through Entity?“, do so now and then come back here!

This is one article in a multi part series we are doing on S Corporations. Before we dig too deep on S Corps we need to discuss the alternative options. Many people start their business as a Sole Proprietor or LLC. Lets discuss the tax piece of this setup.

1. Where do I report activity from a Sole Prop or LLC?

As discussed in our previous article a Sole Prop or LLC is considered a pass through entity. You file the activity from a Sole Prop on your personal tax return (Form 1040) via a Schedule C.

If you are a Single Member LLC you would do the same, report activity via the Schedule C.

If you are a Multi-Member LLC you would report the activity on a business tax return (Form 1065) which would include a K1 that you use to bring it to your personal return.

Again, these are considered pass through entities so if you haven’t read our first article, check that out first to understand this concept further.

2. How is a Sole Prop or LLC taxed?

As a Sole Prop or Single Member LLC (SMLLC) you pay your normal income tax rate on the income of your business as well as self employment taxes.

Regular Income Tax Rate: This would be your normal rate that you pay on all ordinary income including a W2 from an employer.

Self Employment Tax (15.3%): This is broken into two separate pieces, Social Security and Medicare. Social Security is 12.4% on your first $137,700 (2020) of business income. Medicare is 2.9% on your total business income. The total combined is 15.3%.

Again, with a Sole Prop or SMLLC self employment tax is over and above your normal income tax rate, so you pay both. There are no deductions or credits to offset self employment tax.

3. Let’s see an example!

Everything makes more sense when you put some numbers to it. So lets look at an example. In this example we are using business profit of $80,000.

Sole Prop/LLC Taxed

In this example with $80k of business profit you will pay $11,304 in self employment taxes, again this is in addition to your normal income tax rate.

Note that it does not matter whether you are a Sole Prop OR a SMLLC, for tax purposes they would both be treated the same. Thus, by simply creating an LLC you are not creating any tax advantages.

This self employment tax is one of the biggest disadvantages to a Sole Prop/SM LLC setup.

4. So now what do I do?

Fortunetly there is a tax strategy we can utilize to help eliminate a portion of your self employment tax and that is by utilizing an S Corporation. In our next article we are going to dig deeper into what an S Corp is and how it can potentially bring tax savings to you!

If you don’t have a tax advisor, you’re paying way more than you should be. Click here to book your complimentary strategy session with JETRO.

What is a Pass Through Entity?

Pass Through Entity - What is it and what does it mean?

Most businesses do not have to pay income taxes on the corporate level. Instead the profits from their business flows through (or passes through) to the owners of the company where it is eventually taxed.

Types of Pass Through Businesses

  • Sole Proprietor
  • Partnership
  • Single Member LLC
  • S Corporation

An example of a non pass through entity would be a C Corporation. In a C Corporation the company pays taxes on the profit of the business at the corporate level.

Basic Concept: If you have a pass through entity you have income and expenses related to the business that are reported on the business tax return (Schedule C, 1065, 1120S). The profit from those businesses are then reported on a personal return where the taxes are paid.

Here is the tax treatment for the various entity types:

Sole Proprietorship or Single Member LLC

File business information on a Schedule C on a personal tax return (Form 1040).

Partnership or Multi Member LLC

File business information on Form 1065 and then each partner will receive a K1 with their share of activity which will be used to report and pay taxes on the business activity on a personal tax return (Form 1040).

S Corporation

File business information on Form 1120S and then each owner will receive a K1 with their share of activity which will be used to report and pay taxes on the business activity on a personal tax return (Form 1040).

C Corporation (Not Pass Through Entity)

File business information on Form 1120 and then pay taxes at the corporate level.

Now you know what a pass-through entity is. Majority of small business owners in the US operate using a pass-through entity.

Check out our episode on the Small Business Tax Savings Podcast for more on this topic!

JETRO Goes Gusto Gold

JETRO Goes Gusto Gold

When JETRO started way back in 2013 we were looking for a modern, cloud based solution for the payroll side of our business.

We spent time researching and testing all the various options out there and just could not find a good fit that matched our model: modern, robust, and simple to use.

Luckily in 2014 we got introduced to Gusto and have not looked back since. Based on our research and experience, it is by far our preferred choice for payroll. Whether we are doing the payroll on behalf of clients or clients are handling it themselves we know they are in good hands when using Gusto.

As part of this journey we are proud to announce that we are now a Gusto Gold Partner!

Thank you Gusto for continuing to innovate and provide such an easy to use payroll solution for both JETRO and our incredible clients.

Want to learn more about Gusto? Reach out to us!

How should I structure my business with multiple owners?

How should I structure my business with multiple owners?

We often times get business owners that reach out to us that have multiple owners in their company, wondering what the best way is to structure their business.

In this specific article we are assuming an S Corp structure is desired prior to it reaching the owners personal tax return. If you don’t know what an S Corp is, we will dig into that in future post but in a nut shell it is a tax strategy to help limit the amount paid in self employment taxes.

With that assumption there are two main options we typically suggest. Note that this also assumes that all owners are going to be active within the business (not just silent investors).

Option 1

Setup company as an S Corporation with each owner as a shareholder in the business personally.

  • Advantages
    • One company, one tax return, one payroll account
    • Easier to setup and less maintenance
    • Cheaper
  • Disadvantages
    • Various owners cannot take advantage of tax strategies that help them but not other owners.
    • If you have multiple businesses you may need multiple S Corps.
    • Less Flexibility

Option 2

Parent company is a partnership with each owner having their own S Corp that owns their percentage in the partnership.

  • Advantages
    • Each partner can utilize tax strategies as they see fit (hire kids, business automobile, etc).
    • If they own multiple businesses their personal S Corp can hold the ownership in those and all business income will flow through their S Corp prior to reaching them.
  • Disadvantages
    • Multiple companies, multiple tax returns, multiple payroll accounts
    • More to setup and maintain
    • More expensive


With that being said, lets run through some scenarios.

Scenario 1: Two owners and one wants a Mercedes for his business vehicle and the other wants a Prius. In option 1, there could be some conflict because the price for these are vastly different and the person with a Prius does not get as much out of the tax strategy. However in option 2, it doesn’t matter because they can hold the vehicle ownership in their personal S Corp and do whatever they want with affecting the other owner.

Scenario 2: Two owners in which they are 100% active in the business with no other ventures. In option 2 they would have to pay for a tax return for the partnership and then two S Corps. They would also have to run two separate payrolls for each S Corp. Rather if they chose option 1 it would be one business return and one payroll which means it is more cost effective.

Generally if the owners have multiple businesses they participate in, we will suggest option 2 since they will want all income to pass through an S Corp anyways so they can avoid a portion of self employment taxes.

If the owners are on the same page as far as spending and tax strategies, we typically say option 1 is fine for them to help minimize costs and maintenance.

Either way, there is no one size fits all for every situation so be sure to discuss with a tax professional to ensure you get things right from the beginning.

Check out our episode on the Small Business Tax Savings Podcast for more on this topic!

Company Retreats – Connect w/ Your Employees or Clients

On June 29th and 30th here at JETRO we held our annual team retreat. Typically we get our staff together in a city for a few days to hang out but due to COVID we were limited to a virtual retreat this year. Given the circumstances our staff made the best of it and we had a great time and covered a lot of ground.

Retreats are important not only for us but for you in your business. Here is why we hold an annual retreat:

  • Get to know each other on a more personal level
  • Be transparent and update your team on the company vision and what the future looks like
  • Make important decisions and involve everyone
  • Show appreciation and how much the team means to you and your company

Whether you bring everyone together or hold a virtual team retreat I encourage to make it happen as you will see it truly unites your team.

On the Small Business Tax Savings Podcast below we share more information on this!

JETRO Goes Xero Gold

JETRO Xero Gold

When JETRO started way back in 2013 we were on the the forefront of virtual accounting. As part of that, we needed to find a cloud accounting solution that we could utilize not only internally but across our client base. We needed something that we could access via the cloud anywhere, anytime. After a lot of research and trial we landed on Xero, who at the time was fairly fresh in the US market.

Since then we have not looked back and continue to introduce Xero to thriving clients across the country. As part of that journey we are proud to announce that we are now a Xero Gold Partner!

Thank you Xero for continuing to innovate and provide such a “beautiful accounting software” to both JETRO and our incredible clients.

Want to learn more about Xero? Reach out to us!

JETRO Giving Back to the Community

Giving Back to the Community

Here are JETRO we take seriously the act of helping others and the community. Every year we make a donation to various charities and initiatives based on the amount of tax returns we file. This year we also included an additional amount for each Small Business Tax Savings Podcast review we received.

As a client of ours and reviewer of our Podcast you play a role in this donation. The amount we contribute is directly related to you partnering with us.

I just want to say, THANK YOU! Thank you for working with us and listening to our Podcast so we can make a donation on your behalf.

This year we are proud to announce our support for the following charities and initiatives:

1. Mobilize MKE

COVID-19 has caused a 35-50% spike in the number of people needing the services of food banks in Metro Milwaukee. This pandemic has also forced the cancellation of many food drives, multiplying the food crisis our neighbors are facing right now. These food pantries tell us they anticipate seeing even greater need in May. Donations made will service local food pantries.

Learn More Here

2. American Foundation for Suicide Prevention

A gift to the American Foundation for Suicide Prevention helps fund their mission to save lives and give hope to those affected by suicide. Each dollar brings us closer to a world without suicide.

Learn More Here


3. Make-A-Wish

The mission of the Make-A-Wish Foundation is to create life-changing wishes for children with critical illnesses. The children they serve are fighting for their lives, and their families are doing everything that they can to help them in their battles.

Learn More Here


4. National Multiple Sclerosis Society

Multiple sclerosis (MS) is an unpredictable disease of the central nervous system that disrupts the flow of information within the brain, and between the brain and body. The Society’s mission is: People affected by MS can live their best lives as we stop MS in its tracks, restore what has been lost and end MS forever.

Learn More Here


Again, we are able to make these donations on your behalf due to your partnership with us. We thank you for that and look to continue to help the communities around us and those that are less fortunate.

Coronavirus (COVID-19) – Accounting and Tax Outlook

*Continuously Updated As More Information Becomes Available*

Welcome to our JETRO Coronavirus (COVID-19) Tax and Accounting Resource Center. Much of this information is rapidly changing. We will be updating information as it becomes available to us. Below are the headlines on various topics listed below. Each topic has buttons on the bottom to link to available resources.

The link directly below is the most comprehensive overview of all relief options to check out, provided by Gusto!

  • General Information
  • Government Loan Information
  • Business Relief Information
  • Personal Relief Information

General Information

Tax Deadlines/Extensions and Student Loan Payments by Employer

  • New Tax Return and Payment Deadline: July 15th (Individuals, Trusts, C Corps) – If you want to extend your return to October 15th that formal extension is also now due by July 15th.
  • 2020 Q1 and Q2 Estimated Tax Payments Due: July 15th (Previously April and June 15th)
  • Employers are allowed to contribute up to $5,250 tax-free annually to assist their employees with student loan payments. This covers payments up until December 31, 2020.


These next few weeks (or months?) for business owners and individuals alike will be tough. However, as business owners this poses an opportunity for leadership.

I touch on this specific topic in this weeks Small Business Tax Savings Podcast episode which I have provided before.  Here is a brief summary:

1. Be A Leader

To your employees, clients, and community.


2. Embrace the Situation

Think of ways you can modify your business to maintain during this tough time. Do not just stick your head in the sand and give up. INNOVATE! 


3. Do Planning

Plan for the various situations (good, bad, ugly) and determine what your business will do if you hit those certain benchmarks. 

As we are navigating these unexpected waters together, let us know how we can help. We are that partner on your team to get through this together!


1. Do Planning

Put together a plan on how your business will react at certain thresholds. Do a Good (3 weeks), Bad (2 months), Ugly (3-4+ months) plan so you know ahead of time what actions your business needs to take depending on how long this lasts.


2. Expense Cutting

Go down your income statement and see what items you can cut or downgrade. If you have any software fees is there any you can move down a package (Premium to Standard) temporarily. Start implementing these cuts today to maintain cash.


3. Slow Down Cash Outflow

Do you have any bills or rent payments that you can negotiate for short period of time? Reach out to loan providers and see if you can move to interest only payments temporarily. If they say no today, try again in a couple days.


4. Funding

Look into an SBA loan if you need cash now. Look into zero interest credit cards to see if those may be an option for you.

Government Loan Information

Paycheck Protection Program (PPP) Updates

The House, Senate and President signed the PPP update bill into law. Here are the changes:

🔸Amount of loan needed to be spent on payroll moves from 75% to 60%

🔸Amount of time to spend the funds moved from 8 weeks to 24 weeks (or end of 2020)

🔸Pushes back June 30th deadline to rehire workers to December 31st

🔸Repayment term of unforgiven amount moves from 2 years to 5 years

A few more updates we talk about in this weeks Small Business Tax Savings Podcast:

🆓 Free Tool for Forgiveness Application: https://lnkd.in/shrtslug

💰Funding is still available if you have not already received PPP funds

PPP Loan Certification Clarification, Taxability and Forgiveness Application

  1. PPP Certification Clarification: Originally when applying you certified that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”. The SBA and Department of Treasury have determined that there will be a safe harbor regarding that certification.

    The safe harbor is: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

  2. PPP Loan Taxability: Per IRS guidance, the PPP loan amount forgiven itself is not taxable however the corresponding expenses you used the forgiven funds for, you cannot claim as tax deductions.
  3. Forgiveness Application: This has finally been released while still some questions remain but here are some things we do know:

    -Time Period: You can choose between 8 weeks from the day the loan hit your account or 8 weeks that begins on your first payroll date following the disbursement.

    -Payroll Reduction Exemption: There has been new guidance that your forgiveness amount will not be reduced (as it relates to employee retention) if you have reductions related to: Individuals you have made a written offer to rehire but the employee declined, employees whose employment was terminated for cause, or employees who voluntarily resigned.

    -Owner’s Cap: The forgiveness amounts paid to owners eligible for forgiveness is capped at the lower of $15,385 (which is the $100k annualized) or the 8 week equivalent of the owners compensation in 2019, again whichever is lower.

PPP Forgiveness Information

PERIOD: 8 Weeks (Starting the date of first disbursement of PPP funds)


  • Payroll Costs (Capped at $100k of annualized basis per employee) including: gross wages, health care benefits, retirement benefits, state and local taxes but NOT employer portion of FICA or FUTA
  • Interest on Mortgages Signed Before 2/15/20
  • Interest on Debt Incurred Before 2/15/20
  • Rent for Lease Agreements Signed Before 2/15/20
  • Utility Payments


  • Payroll costs must make up 75% of forgiven amount (Ex: $100k PPP Loan, at least $75k payroll)
  • Forgiveness amount proportionately reduced by decease in head count or employee wages unless employer reverses that prior to June 30, 2020
  • Keep documentation of expenses (payroll reports, tax filings, receipts, etc) to backup the items for proof of forgiveness

Also important to note that things are ever changing so this is what we know now but we expect more details to come from the government regarding the topic of forgiveness.

4/27/20 Update: The Government has approved more funding to the PPP and will begin taking applications again 4/27/20.

4/16/20 Update: The PPP loan has reached its funding capacity. News is that Congress is working on allocating more funding to this program.


-Interest Rate: 1% – Updated as of 3/31/20
-Term: 2 Years – Updated as of 3/31/20

Business Relief Information

Employee Retention Tax Credit (ERTC)

We’ve talked heavily about EIDL and PPP but what about ERTC? Don’t you love all the acronyms?

In order to be eligible for the ERTC you need to prove that you either:

1) Suspended operations fully or partially due to a COVID-19 shutdown order OR
2) Show a 50% or grater decline in revenue as compared to the same quarter of the prior year.

If you are eligible you can get a ERTC which is a refundable payroll tax credit of 50% up to $10,000 of wages per employee which essentially is a max of $5,000 per employee.

The ERTC cannot be combined with the PPP.

Example: Eligible employer pays 6 employees $10,000 each in the eligible period for Q2. The ERTC available to the employer would be $5,000 per employee or $30,000.

Personal Relief Information

The 1099-Misc Filing Date Is Just Around The Corner—Are You Ready?


Article Highlights:

  • Independent Contractors
  • Non-employee Compensation
  • 1099 Filing Requirement
  • Due Dates
  • Penalties
  • Form W-9 and 1099 Worksheet

If your business engages the services of an individual (independent contractor), other than one who meets the definition of an employee, and you pay him or her $600 or more for the calendar year, then you are required to issue that person a Form 1099-MISC to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. Payments to independent contractors are referred to as non-employee compensation (NEC).

Note: The IRS has cautioned taxpayers who are treating rental activities as a trade or business for purposes of claiming the 20% passthrough deduction that they are required to issue 1099-MISC forms to their services providers who meet the $600 test for those rental activities.

Because so many fraudulent tax returns are filed right after e-filing opens up in January, the IRS requires 1099-MISCs for NEC to be filed by January 31 and will not release refunds for individual income tax returns that include the earned income tax credit until the NEC amounts can be verified.

Thus, the due date for filing 2019 1099-MISC forms for NEC is January 31, 2020. This is also the same due date for mailing the recipient his or her copy of the 1099-MISC.

It is not uncommon for a business or rental property owner to have a repairperson go out early in the year, pay him or her less than $600, use his or her services again later in the year, and have the total paid for the year be $600 or more. As a result, the business or landlord may have overlooked getting the needed information from the individual to file the 1099s for the year. Therefore, if you own a business or are a landlord, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers will eliminate any oversights and protect you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, then it would be a good idea going forward to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you.

The government provides IRS Form W-9, Request for Taxpayer Identification Number and Certification, as a means for you to obtain the vendor’s data you’ll need to accurately file the 1099s. It also provides you with verification that you complied with the law, in case the vendor gave you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 prior to engaging in business with them. The W-9 is for your use only and is not submitted to the IRS.

The penalty for failure to file a required information return due in 2020, such as the 1099-MISC, is $270 per information return. The penalty is reduced to $50 if a correct but late information return is filed no later than the 30th day after the required filing date of January 31, 2020, and it is reduced to $110 for returns filed after the 30th day but no later than August 1, 2020. If you are required to file 250 or more information returns, you must file them electronically.

In order to avoid a penalty, copies of the 1099-MISCs you’ve issued for 2019 need to be sent to the IRS by January 31, 2020. The forms must be submitted on magnetic media or on optically scannable forms (OCR forms).

Note: Form 1099-MISC is also used to report other types of payments, including rent and royalties. Payments to independent contractors are reported in box 7 of the 1099-MISC, and the dates mentioned in this article apply when box 7 has been used. When the 1099-MISC is used to report income other than that in box 7, the due date to the form’s recipient is January 31, 2020, while the copy to the government is due by February 28, 2020.

If you have any questions, please call. This firm prepares 1099s for submission to the IRS along with recipient copies and file copies for your records. Use the 1099 worksheet to provide this office with the information needed to prepare your 1099s.