Tax Tips for Single-Owner S Corporations

Corporations provide a number of tax benefits over sole proprietorships and general partnerships. An S corporation often provides more tax savings to shareholders because of the pass-through tax treatment. When you are the sole owner, you potentially increase the benefits further, because you avoid the conflicts with other shareholders that could adversely affect salary, bonus, distribution and expense decisions.

Increase your annual salary and pay yourself a sizable performance bonus. In a corporation with multiple shareholders, the shareholders and the board typically must agree on the salary increase and the bonus. When you are the sole shareholder, you can hold all of the positions -- president, director and shareholder -- and can approve whatever salary or bonus you determine is suitable. You can increase your salary or bonus as you wish to decrease the company's net income and, hence, the taxes. However, be aware that the Internal Revenue Service may scrutinize large, inconsistent salary jumps.

Withdraw any distribution amount, up to the amount of the net income, that the company can support. For tax purposes, the IRS assumes that S corporations pass through all net income or losses to shareholders, whether or not the corporation actually does so. As the sole owner, you alone make the choice regarding how much of the profit to physically distribute to your bank account. In addition, as an S corporation shareholder, you do not pay self-employment taxes or Social Security and Medicare taxes on dividends. A higher dividend distribution may provide a greater tax benefit than a higher salary or bonus.

Write off personal business expenses you incur as a shareholder who is also an employee. Usually a corporation's board or shareholders must vote to approve the level and type of expenses the company will deduct, but you avoid this formality and the risk of having some expenses denied as a single owner. When you provide yourself with health or life insurance benefits, you must claim those benefits as taxable income; however, you can deduct what you spend on health insurance on your personal income taxes as a self-employed individual.

As the sole shareholder of an S corporation, you are free to create a SEP IRA, which is a simplified employee pension individual retirement account. Your company can contribute up to 25 percent of your salary or $50,000, whichever is less, and it books the contribution as an expense. Note that if you have other employees, the company also must make contributions to their accounts. Alternatively, you can set up a single-participant 401(k) plan that is restricted to the business owner and a spouse. The combination of employer and employee contributions cannot exceed $40,000 or 100 percent of compensation, whichever is less. As with the SEP, the company's contribution is tax deductible.