C-Corp vs S-Corp
This question was posted on are recent entry on selecting the business entity type for consultants:
"From talking to a few accountants, they seemed to think that a C-corp was a better deal for many small businesses than the S-Corp because of additional medical reimbursement plans and other fringe benefits.
Can you comment on the benefits of S versus a C for a sole business owner (in California, say)?
Again, this assumes that you don't leave money in the C to be 'double-taxed' - it's either paid out in salaries, or used in pension plans, etc."
As with most things, it depends. If you are a consultant operating as a C-corp (which is just a regular coporation that hasn't made an S-corp election) it's likely your corporation is a PSC. Here's a snippet from the IRS web site.
"A corporation is a qualified personal service corporation if it meets both of the following tests:
1. Substantially all of the corporation’s activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and
2. At least 95 percent of the corporation’s stock is owned by employees performing services for the corporation, retired employees, the estates of employees, or other persons acquiring stock in the corporation by reason of the death of employees."
So for small retail or manufacturing companies, a C-corp will likely be a better option because the tax rates for corporations tend to be lower than personal rates. However, if your corp is a PSC, you are subject to the 35% flat tax.
You would need to look at your own specific situation to see if the medical benefits would outweight the additional federal tax imposed on PSCs. The rules regarding the deductibility of medical premiums have changed in recent years so S-Corps shareholders can deduct the medical premiums paid by their company. I would imagine that the taxes would be higher than any fringe benefits but again you need review your own situation to make a determination on which is better.
As far California goes, both C & S corporations are subject to an $800 minimum tax starting your second year and due every year thereafter regardless of profitiability. There's no special PSC rate for California income tax. The California tax rate for most C-corporations is 8.84%.