How an S-Corp Can Reduce Self-Employment Tax

Self-Employment Tax

One of the biggest challenges for business owners is coming to grips with the vaunted self-employment tax.  Unlike wage earners that only pay 7.65% on their wages for Social Security and Medicare, people that are self-employed pay 15.3% on up to $128,400 of their business income and then 2.9% on additional business income above the $128,400.

Advantage of an S-Corp

One way to help lower your self-employment tax is to organize your business as an S-Corporation.  If you organize your business as an S-corporation, you can classify some of your income as a reasonable salary and some as a distribution. You will still be liable for self-employment taxes on the salary portion of your income, but you will just pay ordinary income tax on the distribution portion.  

The proper salary amount varies for each business and you should consult with a professional before deciding the right amount.

Who Can Become an S-Corp?

Any existing LLC or Corporation can make an election to be taxed as an S-Corp by filing Form 2553 with the IRS.  In NJ, there is a separate form, CBT-2553 which needs to be filed as well.  Any self-employed individual can get an EIN and create a new Corporation or LLC and elect to be taxed as an S-Corp. 

If you have any questions or would like to further discuss if an S-Corp is the right entity for you, please feel to reach out to us at 201-604-2432 or jldonenfeld@jldtax.com.