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Comment by alex1 | Hacker News Reader

The big reason people do an S-Corp is to avoid double taxation (and to be a corporation rather than LLC while not having the complex structures of a C-Corp). Better than being a sole proprietor. Keep in mind that S-Corps can only have a certain number of shares and shareholders (100?) in one class of stock, so a startup or large corporation can't be an S-Corp and take advantage of the tax benefits. Also, here in California, all corporations (S and C and even LLC) owe tax even if the company's net income is zero.

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Um, I'm not a CPA, and I definitely don't know how California taxes work, but at the federal level, isn't that (taxation at the corporate level) pretty much the opposite of how an S-Corp works?

An S-Corp just avoids double taxation. Salaries paid out are subject to FICA. As for the remaining business income, each shareholder would still owe taxes based on how much of the business they own. This is different than a C-Corp where the business income would be taxed at the corporate level in addition to the owners paying income tax on their salaries. And if the owners of a C-Corp decided to pay themselves huge dividends to avoid normal income taxation, that would raise red flags.

In California, S-Corps pay a 1.5% franchise tax on net income (minimum $800). You pay this even if your net income is zero or negative. You pay this no matter what.

Disclosure: I'm also not a CPA.

Yeah, Alex, I'm just saying: S-Corps don't pay federal corporate taxes, do they? I thought that was the point of an S-Corp. Your comment, before you edited it, said flat-out that they did.

(We file as S, but thankfully I'm not the person here that has to know exactly how this stuff works. See previous comments for evidence that you should not take tax advice from me.)

Right, yeah, looks like S-Corps don't pay federal corporate taxes. I knew it was to avoid double taxation but I had forgotten which taxation S-Corps were exempt from. My bad. Unfortunately, for California, you owe the 1.5% (minimum $800) franchise tax on company income whether you're an LLC or S-Corp or C-Corp. In NYC, you are subject to the full corporate income tax rate, even as an S-Corp.

That explains why I suddenly had to start paying NY taxes, even though I live in Illinois (we started filing differently).

Sure ... but what does that have to do with dodging FICA taxes, which are not the double taxation in question?

And people absolutely do pay themselves ridiculously low wages and take the rest in profit, and choose S-Corps specifically in order to make it possible. The incentive is too big: Pay yourself 100k in salary out of your 100k total? Or 50k and take the other 50k as a distribution, saving 15% on it along the way?

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