An S corporation passes its income and losses directly to its shareholders for tax purposes. This avoids double taxation. However, shareholders must pay themselves reasonable salaries subject to payroll taxes.
Tax Implications for Shareholders
The owners pay regular income tax on their distribution, but they do not pay self-employment tax on this distribution. If the owners are employees, they receive a salary, from which FICA taxes are withheld. The advantage is that you only pay FICA payroll tax on your wages.
Employment Status and S Corp Election
Is S Corp income considered self-employment income?
No, S corporation owners are not considered self-employed. They don’t pay self-employment tax on their distributions from the business.
Becoming an S Corporation
To get S-corp tax status, submit Form 2553 to the IRS. This status helps to avoid higher Medicare and Social Security taxes.
Advantages of S Corp Status
The main benefit over being self-employed is the tax savings on self-employment taxes. An S corporation must pay a reasonable salary to any shareholder/employee. Owners of an S corp qualify as employees and must receive a salary if actively managing the company. They pay FICA taxes on wages but not on remaining S-corp profits.
Owners of S corporations are not considered self-employed in the same way as partners in a partnership. They do not have to pay self-employment tax on their share of the corporation’s income. The benefits of an S Corp include significant tax savings on self-employment taxes.