quorumof1
Employee Tax Expert

Business & farm

Hi There:

 

Assuming you are currently an LLC or self employed then within limits all net income is subject to individual self employment taxes.

 

S Corp is a legitimate vehicle to lower individual self employment taxes since since only officer W2 wages will be subject to self employment taxes, which is paid by the S Corp. The balance of income will be reported by shareholder by K-1, but it will be considered passive income which is not subject to self employment taxes. 

 

On the downside an S Corp has significant extra paperwork such as an 1120S Tax Return, employment tax returns and administration fees which will be required to keep the 1120 S a legal entity.

 

On your individual tax return. S Corp K1 earnings are considered passive income,  which if large enough could lead to a separate add on of- net investment tax of 3.8%. Also additional passive income could possibly lead to a lower retirement account deduction due to lower active income. (all is circumstance dependent)

 

Finally, The IRS requires all S Corp officers to take a salary equal to the fair market value of services rendered, so a W2 salary is not optional and should be fairly considered, and as mentioned, subject to employment taxes at the S Corp level.