As a Business Owner What Income is Subject to FICA/Self-Employment Tax?

Self employmentWhen looking at what entity you should use to set up your new business there are a number of things you need to consider and one of these is how will your income be taxed for FICA/self-employment (FICA) tax purposes.  Because you are now the employer and employee this tax rate is a whopping 15.3%, which means the more of your income you can keep from being subject to the FICA tax, the more money you are going to be able to keep in your pocket to run your business.

The following will give you some guidance on what income is subject to the FICA tax and what income is not.

C Corporation – Wages paid to the shareholder-employee are subject to FICA tax.  Distributions paid from a C Corporation are not.

S Corporation – Wages paid to a shareholder-employee are subject to FICA tax.  (which you must pay yourself a wage in order to stay compliant), but pass-through income reported on your K-1 is excluded from the shareholder’s self-employment income.  S Corporations are many times a great entity to use to help limit your FICA tax.

General Partner (General Partnership or LLC) – Pass-through income is included in the partner’s self-employment income and is subject to the FICA tax if the partnership engages in a trade or business.  Guaranteed payments to a general partner are also included in self-employment income and are subject to FICA tax.

Limited Partner (Limited Partnership or LLC) – Pass-through income is excluded from the limited partner’s self-employment income and is not subject to the FICA tax.  Guaranteed payments for services are included in self-employment income and are subject to the FICA tax.

Sole Proprietorship – All proprietor earnings are self-employment income and are subject to the FICA tax.  This is true whether the proprietor works in the business or hires others to do the work.

 

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