Size-wise, New York state might only rank as the 27th largest in the U.S., but its population of 20.2 million makes it the fourth most populous. In addition, the state was the largest port of entry for legal immigrants, with more than 12 million passing through Ellis Island’s 60-year history alone, ensuring its immense economic growth as a business, financial, media, and export center.
The number of small business owners continues to increase in New York, and this data shows that there now are 2.3 million employees with less than 500 employees. Doing business in the state does not come without challenges, including higher taxation and regulatory compliance. However, New York state provides opportunities because of its proximity to the vast cities of the eastern seaboard ad its competitive labor market.
An S Corp can provide substantial tax benefits for some small business owners because of its pass-through taxation. Business owners pay tax on their income according to their individual tax rates after the business has paid the owner or shareholder salaries and taxes.
Despite what many people think, an S Corp is not a formal business structure; it is a tax designation that a business elects from the IRS.
Since an S Corp is not a tax designation suitable for all small businesses, read on to see if your company meets the requirements, if it will have the expected tax savings, and how to file for the tax designation:
Before choosing the S Corp status for your New York business, you need to ensure it meets the following requirements and restrictions:
· The company must issue one class of stock
· It can only have up to 100 shareholders
· All shareholders must agree on the S Corp status
· Only U.S. citizens and permanent resident immigrants can become shareholders
· The shareholders must be individuals or certain estates or trusts
· No partnerships, corporations, or non-resident aliens can become shareholders
· The company must hold and keep records of meeting minutes
· The business must maintain detailed records of all its finances
· Businesses in New York must file biennial reports, the first one in the month of incorporation to the Department of State’s Division of Corporations. These filings cost $9, and online submission makes it easy. However, failure to file can lead to dissolution or loss of good standing status in the state.
Pros and Cons of a New York S Corp
The owners of a New York S-corp become employees of the company, paying themselves a reasonable salary. Salaries are a business deduction, and the business also pays the obligatory Social Security and Medicare taxes for the shareholders at the lower employer rate.
The tax savings for the business come from the fact that the business profits paying these salaries are only subject to income tax. However, the shareholders must earn a reasonable salary that compares to market values for the work they offer, according to the guidelines provided by the IRS.
There are some cons for S Corp owners. One is that they often find it challenging to finance something on a personal level because of limitations on their earned income.
The profits of an S Corp are subject to lower tax rates, but the business must consider the local tax structure to ensure that they will benefit from the savings. One example is New York City and the 8.85% business tax it imposes on S Corps, a tax that significantly affects the expected tax savings of a business.
A small business in New York can apply to become an S Corp if it has a legal business structure like an LLC or C Corporation. However, the entrepreneurs who started TRUiC, the business information company that business owners rely on, suggest that the best way to start an S Corp NYC is by preferably forming an LLC. This is because S Corp restrictions negate the advantages of a corporation, and LLCs are much easier to maintain.
A business must first form the LLC or corporation and then elect the S Corp status by filling in Form 2552 with the IRS when applying for the business EIN. A company is only considered and taxed as an S Corp in New York after filing a second form – Form CT-6 from the New York Department of Taxation and Finance.
Thanks to several factors, New York is a hub for small and big businesses alike, despite its higher taxes and regulatory compliances. The S Corp tax designation can help small business owners to save money on self-employment taxes. However, the business owner needs to calculate whether it is better than the default LLC tax status before deciding, especially if the business is in New York City, where they pay a business tax. Once a company has its legal structure, choosing S Corp status is effortless.