The S Corporation Strategy to Avoid Self-Employment Tax

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The S Corporation Strategy to Avoid Self-Employment Tax

Today's focus is on a significant financial benefit of S Corporations: avoiding self-employment tax on flow-through income. Unlike sole proprietors or partners in a partnership, S Corporation income and resulting distributions are generally not subject to self-employment tax, provided the owners pay themselves a reasonable salary. This can lead to substantial tax savings, as self-employment tax encompasses both Social Security and Medicare taxes. Avoiding those taxes can save you thousands each year. Operating an S corporation requires you to carefully balance compensation between salary and distributions to maximize your tax benefits. Once you master that balancing act, you can easily increase your after-tax profit margin.

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