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If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you\u2019re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation.<\/p>\n
Fundamentals of self-employment tax<\/strong><\/p>\n The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.<\/p>\n What if you conduct your business as a partnership in which you\u2019re a general partner? In that case, in addition to income tax, you\u2019re subject to the self-employment tax on your distributive share of the partnership\u2019s income. On the other hand, if you conduct your business as an S corporation, you\u2019ll be subject to income tax, but not self-employment tax, on your share of the S corporation\u2019s income.<\/p>\n An S corporation isn\u2019t subject to tax at the corporate level. Instead, the corporation\u2019s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn\u2019t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax. \u00a0<\/p>\n Keep your salary \u201creasonable\u201d<\/strong><\/p>\n Be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn\u2019t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation\u2019s distributions to you as wages and impose Social Security taxes on the amount it considers wages.<\/p>\n There\u2019s no simple formula regarding what\u2019s considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.<\/p>\n Converting from a C corporation<\/strong>\u00a0<\/p>\n There may be complications if you convert a C corporation to an S corporation. A \u201cbuilt-in gains tax\u201d may apply when you dispose of appreciated assets held by the C corporation at the time of the conversion. However, there may be ways to minimize its impact.<\/p>\n Many factors to consider<\/strong><\/p>\n Contact us if you\u2019d like to discuss the factors involved in conducting your business as an S corporation, and how much the business should pay you as compensation.<\/p>\n \u00a9 2021<\/em><\/p>\n <\/body> If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you\u2019re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation. Fundamentals of self-employment tax The self-employment tax is imposed on 92.35% […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,10,16],"tags":[8,11,12],"class_list":["post-15484","post","type-post","status-publish","format-standard","hentry","category-articles","category-news","category-small-business-tax","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15484","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=15484"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15484\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=15484"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=15484"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=15484"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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