Is this understanding of S-corp taxes correct?
I think you're misunderstanding how S-Corp works. Here are some pointers: I suggest you talk with a EA/CPA licensed in your state and get yourself educated on what you're getting yourself into.
"In the United States, with an S-Corp, you pay yourself a salary from company earnings.   That portion is taxed at an individual rate.  The rest of the company earnings are taxed as a corporation, which often have great tax benefits.  If you are making over $80K/year, the difference can be substantial.  A con is that there is more paperwork and you have to create a ""board"" of advisors." The thing is, corporate taxes aren't paid on revenues or costs; they're paid on net income.   Meaning no matter what happens, any investment the company makes that improves their net income automatically means more money for the company.    So let's say 12% vs 14% tax.   A 2% increase in tax means a 2% lower net ROI on the investment.    But so long as the incremental improvement to your bottom line is there, the investment is sound, with or without taxes.   EVEN at a 50% corporate tax rate.   You hire one more person at $60k/yr and they make $120k/yr in net income for you.   You still keep $30k of the profits.    It's an incremental increase regardless.  And if that person doesn't make you money?  Say the incremental benefit is 0?   Well your net income just dropped $60/yr.   And you just paid $30k less in taxes.   Meaning the true cost of that hire is $30k to your bottom line.  Where it hurts business is that your retained earnings don't build up as fast.   It makes the next investment harder to make is all.   And as a corporation, if you're not paying dividends you need to keep reinvesting your retained earnings./ "Generally if you're a sole S-Corp employee - it is hard to explain how the S-Corp earned more money than your work is worth. So it is reasonable that all the S-Corp profits would be pouring into your salary. Especially when the amounts are below the FICA SS limits when separating salary and distributions are a clear sign of FICA tax evasion. So while it is hard to say if you're going to be subject to audit, my bet is that if you are - the IRS will claim that you underpaid yourself. One of the more recent cases dealing with this issue is Watson v Commissioner. In this case, Watson (through his S-Corp which he solely owned) received distributions from a company in the amounts of ~400K. He drew 24K as salary, and the rest as distributions. The IRS forced re-characterizing distributions into salary up to 93K (the then-SS portion of the FICA limit), and the courts affirmed. Worth noting, that Watson didn't do all the work himself, and that was the reason that some of the income was allowed to be considered distribution. That wouldn't hold in a case where the sole shareholder was the only revenue producer, and that is exactly my point. I feel that it is important to add another paragraph about Nolo, newspaper articles, and charlatans on the Internet. YOU CANNOT RELY ON THEM. You cannot defend your position against IRS by saying ""But the article on Nolo said I can not pay SE taxes on my earnings!"", you cannot say ""Some guy called littleadv lost an argument with some other guy called Ben Miller because Ben Miller was saying what everyone wants to hear"", and you can definitely not say ""But I don't want to pay taxes!"". There's law, there are legal precedents. When some guy on the Internet tells you exactly what you want to hear - beware. Many times when it is too good to be true - it is in fact not true. Many these articles are written by people who are interested in clients/business. By the time you get to them - you're already in deep trouble and will pay them to fix it. They don't care that their own ""advice"" got you into that trouble, because it is always written in generic enough terms that they can say ""Oh, but it doesn't apply to your specific situation"". That's the main problem with these free advice - they are worth exactly what you paid for them. When you actually pay your CPA/Attorney - they'll have to take responsibility over their advice. Then suddenly they become cautious. Suddenly they start mentioning precedents and rulings telling you to not do things. Or not, and try and play the audit roulette, but these types are long gone when you get caught." "Interesting read. I'm not trying to get political with this post, but it's something that I found genuinely interesting while reading this article.   My dad is an accountant for a large corporation and described tax law as ""15% white, 15% black, and 70% gray"". I'm sure that Cat isn't the only company that is trying to avoid paying US corporate tax rates—regardless of where it falls on the legality or white/gray/black spectrum. This case may be somewhat of an outlier in that it's pretty clear there was some shady tax avoidance and the tax sum is large ($2Bn). Yet, I couldn't help but feel that the amount of government intervention, lawyer/court fees, whistle-blower payout, not to mention company productivity loss from the avoidance, cleanup, etc. puts a damper on the expected value of this case for the general American citizen or tax-payer.  Which leads me to my point. There was some talk recently about the corporate tax rate being dropped down to 15%. I'm someone who generally leans left on issues, but are there legitimate benefits to this? It seems that large corporations simply employ huge teams of accountants to game the tax code and never end up paying anything close to the 30%. Would reducing the rate eliminate a lot of this tax avoidance behavior and result in more system efficiency, while the government returns roughly equal sums of tax revenue from corporations? It would obviously be beneficial to smaller businesses that can't afford the legal means necessary to pay lower rates as well.   From a progressive standpoint, my worry with dropping the rate is that companies would still find ways to simply squeeze more and more profit for the bottom line. It'd be interesting to find a way to leverage reducing the tax rate on large corporations by somehow tying it to increased pay and benefits to workers. I'm not sure of the proper implementation, but letting corporations keep more of their money without the hassle of ""setting up 70 shell companies"" and incentivizing them to re-invest in workers, R&amp;D, etc. makes more sense than companies never paying 30%, and even when caught for illegal acts, being tied up in court for 10 years.   I'll end here because I'm beginning to ramble a bit, but the article was interesting for viewing corporate taxation on a system-wide level." I am not sure how they do it in the Nordic countries, but here in the US a lot of company owners like myself are taxed through the corporation. So in effect, raising taxes on corporations is the same as raising taxes on the business owner. That being said, I kind of agree with the sentiment of the article. If you lower taxes on me and my company, that money is going into savings. That money isn't going to be reinvested. Our budget is where our reinvestment comes from, not extra cash at the end of the year. They take in a *lot* through Corporation Tax, so it'd be relatively unfair to non-business owners and non-shareholders to put it onto VAT and income tax. In the Starbucks case, they'd still want to get the money out of the country so would end up paying no more tax than now.  One alternative along the lines you state, though, would be to crank up capital gains and dividend taxes to match what's taken in by Corporation Tax now. After all, those are the other ways (than income) for owners and shareholders to extract value from corporations and would be tricky to dodge unless you're outside of the EU. This doesn't make much sense. What costs are you referring to? And aren't they using roads, airports etc that federal money goes into? Do you think payroll taxes paid through employees should be the major consideration on payment of taxes for corporations? Also, do you think European criticism of Amazon for avoiding paying taxes is off-base? "Oh, I understand now -- we're having an absurd, meaningless conversation about an obscure theoretical point.  When you can tell me how you can determine a ""minimum cash"" level from a public company's filings, we can continue the discussion.  Otherwise, make a simplifying assumption and move on.  I misunderstood -- I thought we were actually trying to understand the difference between enterprise value and equity value / understand the implication of an enterprise value multiple." Yes, that is correct. Note, when there is a tax treaty between Canada and the other country -- [which is pretty much anywhere you have active business](http://www.fin.gc.ca/treaties-conventions/in_force--eng.asp) -- the tax credits are equal to the income received, making it tax free. Here is a better explanation:  &gt; The greatest advantage of having a foreign affiliate in the international business setting is  to repatriate foreign profits back to Canada tax free under certain conditions, for example,  if a foreign affiliate carries on an active business in a designated treaty country (i.e. a  country with which Canada has a tax treaty). The after-tax profit is included in a pool  called “exempt surplus”. If the repatriation of profit in the form of dividend was paid out  of the “exempt surplus” pool to a Canadian corporate shareholder, such dividend is  included in its income and the same amount is allowed to be deducted in computing its  taxable income. In other words, the dividend is not subject to Canadian tax if received by  a Canadian corporate shareholder.   [Source, p3](http://www.canadataxplan.com/test/canadataxplan/files/Book%20-%20English_summary_12-22-2008.pdf)  Edit... here from the NRC site:  &gt; Treaty Countries: **Active business income earned in a treaty country is classified as “exempt surplus.”** The exempt surplus of an FA also includes inter-affiliate dividends received out of the exempt surplus of other foreign affiliates, the exempt portion (25%) of all capital gains, and certain taxable capital gains. **Dividends paid out of the exempt surplus of an FA can be received free of additional taxes in Canada**, since the profits out of which they are paid are considered to have borne a rate of tax in the treaty country comparable to that of Canada.  [Source](http://www.nrcan.gc.ca/mining-materials/taxation/8880) see the section on Subsidiary Income. This is the reason BK is moving to Canada. [Also here is a very interesting deck on corporate tax minimization in latin america by the Canadian mining industry.](http://miningtaxcanada.com/wp-content/uploads/2010/05/TOR01-5160395-v1-RMLF_Cartagena_Slides.pdf) Dividends and interest are counted under operations for the purpose of this tweet. This is pretty much entirely a non-story. I'm not sure exactly how they're dividing it up, but it looks like they're only counting stock appreciation as capital gains and counting things revenue from sales (from their subsidiaries as well) under operating income.   This is just from a quick glance over their statement of earning, but that's what it looks like to me. S-Corp income is passed through to owners and is taxed on their 1040 as ordinary income. If you take a wage (pay FICA) and then take additional distributions these are not subject to FICA.  A lot of business owners will buy up supplies/ necessary expenses right before the end of the tax year to lower their tax liability. There are a whole host of types of filings. Some of them are only relevant to companies that are publicly traded, and other types are general to just registered corps in general. ... and many more: http://reportstream.io/explore/has-form Overall, reading SEC filings is hard, and for some, the explanations of those filings is worth paying for. Source: I  am currently trying to build a product that solves this problem. I see several interesting statement in your question.  A. my only income is from my Employer B. I also receive employer stock (ESPP, RSU, NSO). However, employer withholds taxes for these stock transactions through my broker (I see them broken down on my W2).  C. I have been subject to Alternative Minimum Tax. A implies a simple tax return. B and C tell the opposite story. In fact if B is not done correctly The amount withheld due to payroll may be perfect but the under withholding could be due to the ESPP's, RSUs and NSOs.  The AMT can throw everything else out the window.  If a person has a very simple tax situation: Income doesn't change a lot from paycheck to paycheck; they take the standard deduction; the number of exemptions equals the number of people in the family. Then the withholding is very close to perfect.  The role of the exemptions on the W-4 is to compensate for situations that go above the standard deduction. The role of extra withholding is when the situation requires more withholding due to situations that will bring in extra income or if the AMT is involved. "The $100,000 is taxed separately as ""ordinary income"". The $350,000 is taxed at long-term capital gains of 15%. Capital gains is not taxed at 20% until $415,050. Even though $100,000 + 350,000 = $450,000, only $350,000 can be taxed at capital gains. The total ordinary income tax burden will be $31,986 if single, in California. Caveat: By creating a holdings corporation (C-corp), you can section 351 that $100,000 into the C-corp for tax deferment, which won't be taxed until you take money from the corporation. Since you will hold 100% of the voting stock, all distributions will be considered pro rata. Additionally, you can issue yourself a dividend under the rules of 26 USC §§243-246 (a greather-than-80% shareholder who receives a dividend can write-off 100% of said dividend). As long as that dividend doesn't trigger §§1.243-246 of The Regulations by keeping the distribution just under 10% of E&P i.e. $10,000. Wages are deductible against basis so pay yourself $35,000 and keep $55,000 in the corporation and you can decrease the total liabilities down to $22,000 from $31,000, which includes the CA franchise tax. You don't have to pay yourself any money out a corporation to use the money." I am a registered S-corp but for alot of industries that threshold is too low (I'm in housing) &gt;Do you have any insight on average *effective* rates paid by SE owners? &gt; &gt;As a counterpoint to your (very valid) links, filing as S-corp allows for taxes on distributions to be exempt from payroll tax and taxed at much lower rates. Also, being SE allows for various deductions not possible for wage earners. There's probably other examples not immediately coming to mind. &gt; &gt;Also, SE taxes equal taxes otherwise paid by employer + employee. It's just that those employer taxes don't appear on the employee's paystub so not everyone realizes this.   The article I posted also doesn't take into account state taxes, do example non deductible B&amp;O, end user Sales tax or  impact fees... That Employees don't pay or often even know about, yet some of us small business owners are also employees, so we get double taxed...