Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 1 down vote favorite

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?

share|improve this question

1 Answer

up vote 2 down vote

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.

share|improve this answer
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 Sep 20 '11 at 12:37
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: fletchertilton.com/page.php?page=articles&articles=148. – Jack Rodenhi Sep 20 '11 at 15:57

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.