5 ms·

Isn't that only the case if you are paying yourself mainly via distributions? If you are paying yourself a market rate salary and taking any profits at the end

Isn't that only the case if you are paying yourself mainly via distributions? If you are paying yourself a market rate salary and taking any profits at the end of a good year via distributions would they frown on that? Assuming you have shareholders who don't work in the business (say family) I don't see how else you could distribute proceeds back to them.

drone 13y ago
The self-employment tax covers K-1 distributions, etc. If you're inactive (not actually working for the pass-through entity, only receiving profit distributions) your taxes are additionally higher on those distributions. In summary: typical pass-through entity distributions are typically taxed as self-employment income and subject to the SET which attempts to recover the missing employer's half of tax payments. You cannot avoid all employer's half of taxes by taking them as distributions, and whomever told you that has misled you. Now, what you might actually be thinking here, and would be correct, is that for those who earn less than a certain income (which would place them in the top tax bracket), the effect of applying all of those payments as self-employment income generally results in a lower tax rate than the corporate tax rate, and allows for deductions that companies may not have available to them.
- oijaf888 13y ago
  Interesting, that's contrary to what I've heard from multiple sources (and pretty much all literature about the subject that I can find) about S-Corp distributions (again assuming you are being paid a market salary that you would hire someone at to perform similar tasks).
  - drone 13y ago
    "If you have a pass through entity of some sort (S corp, LLC, etc) you can avoid paying payroll taxes on distributions and also avoid double taxation." What you're talking about does not apply to LLCs, it is a special situation only related to S-Corps. Generally speaking, pass-throughs such as LLCs all distributions are taxed as self-employment wages, except under certain conditions.

drone 13y ago

The self-employment tax covers K-1 distributions, etc. If you're inactive (not actually working for the pass-through entity, only receiving profit distributions) your taxes are additionally higher on those distributions. In summary: typical pass-through entity distributions are typically taxed as self-employment income and subject to the SET which attempts to recover the missing employer's half of tax payments. You cannot avoid all employer's half of taxes by taking them as distributions, and whomever told you that has misled you. Now, what you might actually be thinking here, and would be correct, is that for those who earn less than a certain income (which would place them in the top tax bracket), the effect of applying all of those payments as self-employment income generally results in a lower tax rate than the corporate tax rate, and allows for deductions that companies may not have available to them.

oijaf888 13y ago
Interesting, that's contrary to what I've heard from multiple sources (and pretty much all literature about the subject that I can find) about S-Corp distributions (again assuming you are being paid a market salary that you would hire someone at to perform similar tasks).
- drone 13y ago
  "If you have a pass through entity of some sort (S corp, LLC, etc) you can avoid paying payroll taxes on distributions and also avoid double taxation." What you're talking about does not apply to LLCs, it is a special situation only related to S-Corps. Generally speaking, pass-throughs such as LLCs all distributions are taxed as self-employment wages, except under certain conditions.