Can S Corporation Status Reduce Self-Employment Taxes?

Yes. When it comes to self-employment taxes, S Corporations are better than Limited Liability Companies (LLC’s). It is generally agreed that LLC managing owners must pay self-employment taxes on their share of the LLC’s profits and that can amount to more than 15% of taxable income. But S Corporation shareholders only pay self-employment taxes on compensation they receive in the form of salaries and bonuses, not on their share of the corporation’s profits. This represents an obvious benefit.

And to take even further advantage of this benefit, some S Corporation owners pay themselves salaries that are as low as are reasonable (in the eyes of the IRS), leaving more profits (not subject to self-employment taxes) that are allocated to the shareholders.

Tax issues are very complex so it is always advisable to consult with an expert tax advisor before coming to any final conclusions and in determining what salaries the IRS will consider reasonable.

S Corporations can reduce self-employment taxes but LLC’s come out on top when it comes to pass-through treatment of profits and losses. See  “Is pass-through tax treatment the same for LLC’s & S Corporations?“