An S corporation operates a "pass-through" entity, meaning all corporate income and deduction items pass through to shareholders, who then report those amounts on their personal returns. Result: You owe personal income tax on your share of S corp profits.
So if you run your business as an S corporation, consider giving away some shares to low-bracket relatives, including your children, who'll owe less income tax. Share giveaways also can reduce payroll and estate taxes. Here's the full story:
Pour income into different buckets
Say you and your spouse are the only shareholders in XYZ Co., an S corporation. You are an employee, but your spouse isn't. In 2004, XYZ shows net income of $400,000, paid to you as salary and bonus.
Instead, you could pay yourself $120,000 salary as long as you can demonstrate that's comparable to other top executives' earnings at similar companies. The remaining $280,000 balance ($4...(register to read more)