An S corporation is a corporation or LLC that elects pass-through taxation under Subchapter S, so income is taxed once on the owners' returns, and owners who work in the business must be paid a reasonable salary subject to payroll tax.
The savings come from taking part of the profit as distributions, which are not subject to self-employment tax. The election is made on Form 2553 and has deadlines, with late-election relief available.
Why it matters: the reasonable compensation requirement is the audit issue; distributions with no salary invite reclassification. See reasonable compensation.
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