General Discussion
In reply to the discussion: Easy cure for the Social Security issue..This is a no brainer. [View all]exboyfil
(17,862 posts)You have to pay yourself a reasonable salary which is subject to payroll tax.
https://www.legalzoom.com/articles/reduce-self-employment-taxes-with-a-corporation-or-llc
How Can a Corporation or LLC Help Me Avoid Self-Employment Tax?
If you are a sole proprietor, partner, or LLC thats a disregarded entity, youll pay Social Security and Medicare taxes on your share of your companys entire net income.
If you are an S corporation or an LLC taxed as an S corporation, you will pay Social Security and Medicare taxes only on the salary you pay yourself, not on the rest of your business profits.
To understand how an S corporation can save you money, lets suppose you have a two-person general partnership that owns a small clothing store and has $400,000 in profits. Your self-employment taxes on your $200,000 share of the profits will be $20,308.
Now lets suppose you form an S corporation and you and your partner each take a reasonable salary, which you determine is $80,000. You and your business will pay Social Security and Medicare taxes of $12,240 on your salary, but you will not pay those taxes on your share of the remaining business profit. Thats a tax savings of more than $8,000 for each partner.
So does that mean you can pay yourself a salary of $1 for the year and avoid Social Security and Medicare tax altogether? No. You must pay yourself a reasonable salary for the work you perform. If you dont you can be audited or be subject to other actions by the IRS.