S-Corps make sense… unless you’re in New York City.

December 22, 2021

Many small businesses are faced with a choice upon the formation of their business in New York - should they choose a Limited Liability Company (LLC) which subjects all of their income to both income tax and self employment taxes (a premium of 15.3% for amounts up to $142,000, and 2.9% thereafter) or an S-Corp for which they pay both income tax and FICA taxes (equivalent to self-employment taxes) on the portion of their income they elect to treat as salary (which must be reasonable), while taking the rest as ordinary income not subject to FICA or self-employment taxes. For many small business owners, the obvious choice is an S-Corp due to the clear savings involved.

Not necessarily so in New York City however, which assesses an additional tax of 8.85% on S-Corp “ordinary income” (i.e. the non-salary portion of the income), wiping out many of the savings inherent in the S-Corp mode. This leads to a situation where an S-Corp may be a good choice for a new business setting up just outside the city limits, but not for one setting up just inside. This different treatment of similarly placed businesses demonstrates the necessity of performing an individual assessment for each new business to ensure it’s elected tax treatment is optimal. This is especially the case where an S-Corp election can’t be easily revoked if the taxpayer realizes later in the year that it’s not the best fit for their business.