Self-employment tax can be a complicated subject for business owners. Many business owners ponder whether there are any legitimate ways to get around this fee. A common choice is to set up a S corporation, however this raises the question of whether or not self-employment tax is avoided.
In order to respond to this query, we must first define self-employment tax. Self-employed people must pay self-employment tax, which is made up of Social Security and Medicare taxes. Self-employment taxes are 15.3% as of 2021, with 12.4% going to Social Security and 2.9% to Medicare.
Let’s now examine the taxation of S corporations. Because S companies are pass-through businesses, no taxes are paid by the company itself. Instead, the business’s gains and losses are transferred to the shareholders, who then declare them on their personal tax returns. S firms, then, do not have to pay self-employment tax on their earnings.
It’s crucial to keep in mind, too, that S corporation shareholders who are also paid staff members must pay self-employment tax on their compensation. This is due to the fact that earnings are taxed for Social Security and Medicare since they are regarded as earned income. But S corporation shareholders can lessen their self-employment tax obligation by giving themselves a fair salary and taking the rest of their income as distributions.
So what could possibly motivate someone to create a S corporation? Limited liability protection, pass-through taxation, and the possibility to avoid double taxation are just a few advantages of this business structure. A few tax benefits and deductions that are not accessible to partnerships or sole proprietors may be available to S companies as well.
Let’s now discuss if a S company is permitted to join an LLC. Yes, a S company may join an LLC, is the correct response. The ownership structure of the LLC must be carefully planned to avoid breaking this restriction because a S corporation is only permitted to have one class of shares.
The last reason is why a S corporation would hold an LLC. One justification is to add another level of liability protection. The assets of the S corporation are safeguarded in the event of an LLC lawsuit or other legal action by creating an LLC and having the S corporation own it. In addition, a S corporation may decide to create an LLC to hold property or other assets unrelated to the company’s operations.
In conclusion, S corporations offer certain benefits when it comes to lowering this tax liability, even if they do not completely avoid self-employment tax. Additionally, the advantages of setting up a S company go beyond tax benefits and could be alluring to small business owners seeking benefits like limited liability protection.