Reference
Glossary
Plain-English definitions of the tax terms used across BizTaxMetrics. Every entry links to the underlying IRS source where applicable. Tax year 2026. Last updated: September 24, 2026.
Reasonable compensation
The W-2 salary that an S-Corp owner-employee must pay themselves for the services they personally perform. The IRS does not publish a percentage or formula — the salary must be reasonable for the owner's experience, duties, industry, and geography. Setting the salary too low to maximize distributions risks reclassification, additional tax, and penalties. The calculator shows a soft warning when the salary is below 30% of net profit, but that's a UI hint, not a legal rule.
#glossary-reasonable-compensation§199A — Qualified Business Income (QBI) deduction
A federal tax deduction that lets pass-through entity owners (LLCs, S Corps, partnerships, sole proprietors) deduct up to 20% of their qualified business income. Made permanent and expanded by the One Big Beautiful Bill Act (Public Law 119-21, signed July 4, 2025). For 2026 the phase-in range is $201,750–$276,750 (single) and $403,500–$553,500 (MFJ). The BizTaxMetrics calculator exposes the S-Corp W-2 drag as an optional toggle.
#glossary-section-199aUBIA — Unadjusted Basis Immediately after Acquisition
The original cost of qualified property held by a business, used in the §199A W-2/UBIA limitation. Above the §199A phase-in threshold, the deduction is limited to the greater of (a) 50% of W-2 wages paid by the business, or (b) 25% of W-2 wages plus 2.5% of UBIA.
#glossary-ubiaSSTB — Specified Service Trade or Business
A category of businesses that face tighter §199A deduction limits at higher income levels. The IRS list includes: 12 categories, e.g. health, law, accounting, consulting, financial services, athletics, and any business where the principal asset is the reputation or skill of one or more of its employees. The BizTaxMetrics calculator surfaces the S-Corp W-2 drag as a generic upper-bound estimate — it does not specifically model SSTB phase-outs.
#glossary-sstbSelf-employment tax (SE tax)
The 15.3% federal tax (12.4% Social Security + 2.9% Medicare) that self-employed individuals pay on their net earnings via Schedule SE. The IRS applies a 0.9235 factor first, so SE tax is really 15.3% × 92.35% = ~14.13% of net profit. The 12.4% Social Security portion is capped at the annual wage base ($184,500 for 2026); the 2.9% Medicare portion is uncapped. A default-taxed single-member LLC pays SE tax on its net profit.
#glossary-se-taxFICA — Federal Insurance Contributions Act
The federal payroll tax that funds Social Security and Medicare. Split into a 12.4% Social Security portion (capped) and a 2.9% Medicare portion (uncapped), totaling 15.3%. Split 50/50 between employee (withheld from wages) and employer (paid by the entity). The 0.9% Additional Medicare Tax applies above filing-status thresholds and is entirely employee-side — no employer match.
#glossary-ficaAdditional Medicare Tax (0.9%)
A 0.9% surtax on wages and self-employment income above the filing-status threshold: $200,000 (single / HOH), $250,000 (MFJ), $125,000 (MFS). Computed via IRS Form 8959. Applies to the combined total of W-2 wages plus SE income (LLC) or salary (S-Corp). There is no employer match — the entire 0.9% is the employee's responsibility.
#glossary-additional-medicareDistribution (S-Corp)
The portion of S-Corp profit that the owner takes out of the business beyond their W-2 salary. Distributions are not subject to FICA or SE tax. They still owe ordinary federal (and state) income tax on the owner's personal return. An S-Corp's total payroll-tax savings depends on the salary-vs-distribution split — that's the whole point of the election.
#glossary-distributionPass-through taxation
Federal tax treatment where the entity itself does not pay income tax; profits and losses flow through to the owner's personal return and are taxed at individual rates. Both the default-taxed LLC and an S Corporation are pass-through entities. A C corporation is the main exception — its profits are taxed at the entity level (currently 21% federal) and shareholders pay a second layer of tax on dividends.
#glossary-pass-throughForm 2553 — S-Corp election
The IRS form a domestic LLC or corporation files to elect S Corporation federal tax treatment. A new LLC must file by the 75th day of the tax year the election is to take effect to be retroactive to the start of the year. Late-election relief is available under Rev. Proc. 2013-30. States generally require a parallel state-level filing.
#glossary-form-2553OBBBA §199A minimum deduction
The One Big Beautiful Bill Act (Public Law 119-21) added a $400 minimum §199A deduction where active QBI is at least $1,000. Both amounts are indexed for inflation beginning in tax years after 2026.
#glossary-minimum-qbiDisregarded entity
A single-member LLC that has not elected corporate treatment is disregarded for federal income tax purposes. Its income and expenses are reported directly on the owner's personal return (Schedule C, E, or F), no separate business income tax return is filed, and the IRS treats the LLC as if it does not exist as a separate taxpayer. The LLC still files its own state returns and still exists as a legal entity. Filing Form 2553 changes this: the same LLC then files Form 1120-S federally while remaining an LLC under state law.
#glossary-disregarded-entityS election revocation and termination
Shareholders holding a majority of voting rights may voluntarily revoke an S election by attaching a statement to the corporation's return for the year the revocation takes effect. The statement can specify an effective date, subject to statutory limits. Once revoked, a new election generally cannot be made for five tax years without IRS consent. An election can also end involuntarily when the corporation stops meeting the S corp rules — too many shareholders, a second class of stock, or an ineligible shareholder.
#glossary-s-election-revocationShareholder stock basis
The shareholder's investment in the S Corp, which starts at the purchase price or contribution and is adjusted annually. Contributions and allocated income increase basis; distributions, allocated losses, and nondeductible expenses decrease it. Basis matters because S Corp losses are deductible only up to the shareholder's basis, and distributions are tax-free only to the extent of basis. Excess distributions are then treated as capital gain. The basis worksheet is part of every S Corp shareholder's return.
#glossary-stock-basisBuilt-in gains (BIG) tax
An entity-level tax that can apply to a C Corporation that later elects S Corp status. If the corporation sells appreciated assets during the five-year recognition period after the election, the built-in gain that existed on the conversion date may be taxed at the corporate level. This rarely touches a newly formed LLC, but it matters when an existing C Corp converts, when an S Corp acquires a former C Corp's assets, or when the entity is measured for passive investment income limits.
#glossary-built-in-gainsEstimated tax payments (Form 1040-ES)
Quarterly advance payments of income tax (and, for the self-employed, SE tax) made when no employer is withholding. Due dates for most filers are April 15, June 15, September 15, and January 15 of the following year. The common safe harbors are 90% of the current year's tax or 100% of the prior year's tax, rising to 110% if prior-year adjusted gross income exceeded $150,000. S Corp owner-employees usually handle this through withholding on their salary plus quarterly payments for the rest of their income.
#glossary-estimated-taxForm 941 — Employer's Quarterly Federal Tax Return
The quarterly return an employer files to report wages paid, income tax withheld, and the employer and employee shares of Social Security and Medicare tax. It is due the last day of the month after each quarter: April 30, July 31, October 31, and January 31. Any S Corp with a payroll runs this form four times a year, along with deposit schedules and the annual Form W-2 filing. A sole proprietor with no employees does not file it.
#glossary-form-941FUTA and Form 940
The Federal Unemployment Tax Act imposes an employer-side tax on the first $7,000 of wages paid to each employee in a calendar year. The statutory rate is 6.0%, but employers who pay their state unemployment tax on time receive a credit of up to 5.4 percentage points, which is why the effective rate is usually 0.6%. Form 940 is filed annually. For a small S Corp, the cost is tiny — about $42 per employee at the effective rate — but it is a real recurring payroll cost.
#glossary-futaPayroll tax deposit schedules
Withheld income tax and FICA taxes must be deposited to the IRS on a schedule set by the employer's liability size: monthly depositors deposit by the 15th of the following month, while semi-weekly depositors deposit on Wednesdays or Fridays for the prior week's payroll. Large payroll liabilities can trigger next-day deposit rules. Missed or late deposits generate trust fund penalties that are assessed personally against responsible persons, which is one reason owner-operators use a payroll service rather than running S Corp payroll by hand.
#glossary-payroll-depositsFranchise tax
A state tax imposed for the privilege of existing as an entity or doing business in the state, owed whether or not the business made money. California, Texas, New York, Massachusetts, and others levy one in some form. It is different from state income tax: a franchise tax is usually a flat minimum, a percent of net income, or a combination of both, and it is assessed on the entity. This is the cost category that most often changes the S Corp breakeven calculation on the state pages.
#glossary-franchise-taxStatement of information / annual report
The periodic filing that keeps an entity in good standing with the Secretary of State by confirming its principal address, its managers or members, its registered agent, and its mailing address. In California it is Form SI-550 for corporations and Form LLC-12 for LLCs; in Delaware it is the annual franchise tax report; in many states it is simply called an annual report. Filing fees here are usually modest, but missing the filing leads to penalties and, eventually, to administrative dissolution.
#glossary-statement-of-informationRegistered agent
The person or company designated to receive service of process and official mail from the state on behalf of the entity. Every state requires a registered agent with a physical street address in that state — a post office box is not enough. Owners often serve as their own agent in their home state and hire a commercial agent in states where they are registered. The fee is typically a separate annual line item from the state's own fee, and it recurs whether the business is active or dormant.
#glossary-registered-agentForeign qualification
Registering an LLC or corporation formed in one state to do business in another state. “Foreign” here means out-of-state, not international. A Texas-owned LLC operating in Colorado is a foreign LLC in Colorado and must qualify there, pay that state's filing fee, and keep good standing in both states. Qualifying in a second state does not move your formation state: you still file annual reports and pay fees to both. Missing qualification can block access to the courts in that state and trigger penalties.
#glossary-foreign-qualificationEconomic nexus
A sales tax connection standard created by the Supreme Court in South Dakota v. Wayfair (2018), under which a business owes state sales tax registration and remittance based on its volume of sales or number of transactions in a state rather than on a physical presence. Most states set thresholds around $100,000 in sales or 200 transactions in a calendar year. Several states apply a similar economic standard to entity-level taxes, so remote or e-commerce revenue can create filing obligations even without an office or employees.
#glossary-economic-nexusGuaranteed payment
A payment to a partner for services or for the use of capital that is determined without regard to the partnership's income. Guaranteed payments are deductible by the partnership and included in the partner's income on Schedule K-1, and they are subject to self-employment tax for general partners. They are the partnership analog of an S Corp salary: a fixed, documented payment for work, independent of whether the business had a profitable year.
#glossary-guaranteed-paymentOwner's draw
Money a sole proprietor or single-member LLC member takes out of the business. A draw is not wages, not deductible by the business, and not subject to payroll or self-employment tax — the profit itself was already taxed on Schedule C, and the draw is simply moving your own money. This is why a default-taxed LLC has no “salary” concept, and why switching to an S Corp introduces one: the S Corp must pay you a real W-2 salary before it can pay you distributions.
#glossary-owners-drawW-2 vs. 1099-NEC
The two common ways a business pays for work. A W-2 employee has taxes withheld, is covered by unemployment insurance, and creates employer-side FICA. A contractor paid on Form 1099-NEC handles their own taxes and is paid gross. Classification is determined by the working relationship, not by the label on the contract, and misclassification carries penalties for back payroll taxes plus interest. An S Corp owner performing services must be on the entity's payroll with a W-2, not paid as a contractor of their own company.
#glossary-w2-vs-1099Beneficial ownership information (BOI) reporting
Corporate Transparency Act reporting of the individuals who own or control a company, filed with FinCEN. The requirement went through years of litigation and shifting deadlines. FinCEN's final rule, issued August 11, 2026 and effective August 14, 2026, permanently exempts companies formed in the United States from BOI reporting and from reporting U.S. person beneficial owners. Only certain foreign entities registered to do business in the U.S. still file, and only for their foreign beneficial owners. Verify the current state of the rule at FinCEN before relying on any summary.
#glossary-boi-reportingEmployer Identification Number (EIN)
The nine-digit federal tax number the IRS issues to businesses, free of charge through the IRS website. It functions as a Social Security number for the entity: you need it to open a business bank account, to run payroll, to file an S election on Form 2553, and to file an employment tax return. Sole proprietors without employees can often use their own SSN, but obtaining an EIN early keeps the entity's identity separate from the owner's from day one.
#glossary-einS Corp eligibility rules
Four gates the entity must pass to keep the election: no more than 100 shareholders; only individuals, estates, and certain trusts as shareholders; only one class of stock (differences in distribution rights are disregarded in the specified circumstances); and U.S. citizens or residents. A partnership or C Corp cannot be a shareholder. Fail any of these and the election terminates, the entity defaults to C Corp treatment, and the year's returns have to be refixed. The rules are also why an LLC with multiple classes of membership interests has to be reviewed before filing Form 2553.
#glossary-s-corp-eligibilityTexas franchise (margin) tax
Texas imposes its franchise tax on a “margin” base — total revenue minus one of the permitted deductions, such as cost of goods sold or compensation — rather than on federal taxable income. Retail and wholesale businesses whose total revenue falls below the comptroller's annually adjusted no-tax-due threshold pay nothing, which is why Texas shows up as a low-cost state for small operators in the comparison table. Entities owe an annual report (Form 05-102-F) whether or not any tax is due.
#glossary-texas-margin-taxCalifornia SDI
California State Disability Insurance, a payroll deduction that funds temporary disability benefits and Paid Family Leave. It is paid entirely by the employee, at a rate the Employment Development Department sets each year — roughly one percent of covered wages up to an annual wage cap in recent years — and it has no employer match. It applies to W-2 wages, so an S Corp owner on payroll pays it while a sole proprietor does not. A small, frequently forgotten line item when comparing CA payroll costs against other states.
#glossary-california-sdi