Can I Save Employment Taxes If I Form An S Corporation Rather Than An LLC?

I am frequently asked this question by founders–is there a potential for employment tax savings if an S corporation is the choice of entity rather than a limited liability company?

The short answer is yes–there is a potential for employment tax savings.

The reason for this is because with an S corporation employment taxes only apply to the salaries paid to the owners, not to dividends.  With a limited liability company, an owner must pay self employment taxes on the owner’s entire distributive share of self employment income.  Self employment taxes are 15.3% of self employment income up to the FICA wage base limit, and then 2.9% of self employment income beyond the FICA wage base limit.

You may also find these articles helpful:  Forbes, New York Times, Wall Street Journal.

The catch?  S corporations must pay their owners a reasonable salary.  This is a hot button issue for the IRS.  The corporation itself must also pay federal unemployment tax on salaries.  

The upside?  Potentially significant employment tax savings.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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