Do you pay self-employment taxes as an S-Corp?
I worked as a consultent for a number of years, just doing regular old programming gigs. While I was doing this I did my taxes as a sole-proprietorship. I had to pay marginal tax and self-employment tax. Which added up to about 30% of my income (15% from self-employment and %15 from marginal)
I just found out that if you are an S-Corp, and you are an employee (the sole employee) of an S-Corp any salaries or bonuses that you give yourself are not subject to self-employment tax.
Does that mean that I gave 15% of my income to Uncle Sam that I didn't really need to?
Incorporation Tax Sole Proprietorship
1 Answer
Nope. Your S-Corp can pay you wages or salary, but if it does, like all employers, it will have to withhold FICA and Medicare. In normal years, this will amount to 7.65%. Also, as an employer, you have to match these amounts. That totals 15.3%. That number probably looks familiar.
You could maybe not pay yourself a salary at all and just let the profit pass through to be taxed on your personal return as S-Corp profit. This is not subject to self-employment tax, but the IRS has been successful reclassifying S-Corp profits as wages where the profit is due mainly to the efforts of an individual.
So, more concisely, no, you did not pay that tax unnecessarily.
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So if my company (with me as the only owner/employee) made $200k, I could essentially give myself a $50k salary and then let the rest of the $150k pass through as profits. This would save me 15% in taxes on the $150k and since I'm getting a regular salary it shouldn't attract eyes from the IRS. Is this correct? – Edgar Miranda 13 years ago
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I don't actually have experience with the IRS reclassifying S Corp earnings as self-employment income, but the tax seminars I attend are recommending that you not consider anything shy of $106,800 as safe (and even that may not be with the new higher Medicare tax to help pay for the health reform plan). I did a Google search on "IRS reclassification s corp income subject self employment tax" and came up with some good links like this one: http://www.fletchertilton.com/page.php?page=articles&articles=148. – Jack Rodenhi 13 years ago
