Frequently Asked Questions

What are the tax implications for shareholders who are also employees in an S corporation?

When it comes to tax implications for shareholders who are also employees in an S corporation, it's important to understand the unique structure of this type of business entity. Unlike a traditional C corporation, which is subject to double taxation (once at the corporate level and again when dividends are distributed to shareholders), an S corporation is a pass-through entity. This means that the corporation itself does not pay taxes. Instead, the business profits and losses "pass through" the entity and go directly to the shareholders, who then report these on their own tax returns. However, shareholders who are also employees of the S corporation have additional tax considerations. They are required to pay a self-employment tax on the salary they receive from the corporation. This is because, in the eyes of the IRS, these individuals are both owners and employees of the business. Therefore, they are subject to self-employment taxes, which include Social Security and Medicare taxes.