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Frequently Asked Questions

What are the implications of self-employment tax for owners of an S corporation and an LLC?

The implications of self-employment tax for owners of an S corporation and an LLC can significantly impact the financial aspects of these business structures. Both LLCs and S corporations operate as pass-through tax entities, meaning the profits of the business are passed through to the owners. However, the way self-employment taxes are handled differs between the two. Owners of an S corporation may not need to pay self-employment taxes if they are treated as an employee and paid a "reasonable" salary by the corporation. This can be a significant advantage for S corporation owners, as it can potentially reduce their overall tax liability. However, it's important to note that the IRS has strict guidelines on what constitutes a "reasonable" salary, and failing to meet these guidelines can result in penalties. On the other hand, LLC members are generally required to pay self-employment taxes on their share of profits. This tax is paid on their personal tax returns, which can increase the overall tax burden for LLC members. However, the flexibility of the LLC structure can offer other tax advantages, such as the ability to deduct pre-tax expenses.
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