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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29558
Experience:  Taxes, Immigration, Labor Relations
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Self Employment Tax question

Customer Question

Hello, I own an S corporation. I have no employees. I am a 100% stock holder. I never got set up to pay myself a salary in my state, so I have just taken the income as a distribution on a K-1 form. I paid self employment tax on 100% of the distribution..........stupid perhaps, but I had been planning on closing the business, going back to working full time for someone else, etc.........In spite of myself, I earned a fair amount of money in 2007. I figure about 58,000 give or take.......this leaves me with I think about 8200 in self employment taxes........I am wondering if it is possible to send myself a 1099 for 40,000 or so, pay the SE on that and take the remaining 18000 as a distribution?   I am thinking probably not, but thought it might be worthwhile to ask.............I also have been told that I really don't have to pat SE tax by one accountant, but others say I absolutely have to, so I will pay something, just wondering if it can be reduced anyway...........
Submitted: 9 years ago.
Category: Tax
Expert:  Lev replied 9 years ago.

S corp is a “pass-through” entity for tax purposes; the income of S corp is passed through to their owners and reported on the owners’ personal income tax returns. (In contrast for C corp the net business income is subject to corporate income tax, and the remaining funds are taxed a second time if distributed as dividends to members) For S corp, only the salary paid to the employee-owner is subject to employment tax. The remaining income that is paid as a distribution is not subject to employment tax.

Consider example. In keeping with the industry standard, you decide that a reasonable salary for your work (based on the time spend and qualification) is $35,000. Your total earnings for the year are $60,000: $35,000 paid in salary are subject of employment tax - $5,355 (15.3% of $35,000). The remaining $25,000 paid as a distribution from the S corp.

Customer: replied 9 years ago.
Respectfully, that really doesn't answer my question, but is a general explanation of S corp pass through income and SE tax. I did not pay myself a salary, and I believe it is too late to do so, hence my question about the 1099..........I suspect I am on the hook for SE tax on 100% of the distribution, but I am interested to find out if there are any alternatives to reduce this this year..........