Company D can reduce Self-Employment Tax

As a sole proprietor, 100% of your profits are subject to self-employment taxes. Self-employment tax is 15.3% of all profits up to $ 94.200 (for 2006). Profits beyond the first $ 94,200 are subject to a 2.9% self-employment tax. If profits from your business are $ 200,000, you pay self-employment taxes of $ 17,037.

The owners of limited liability companies (LLCs) that are active in business operations are generally subject to the same self-employment tax.

Your company can reduce its self-employment tax liability by creating an S-corporation. S-corporation profits are not subject to employment taxes. The owners of wages, however, will be subject to duties, work like any other employee.

Many S-corporation owners do not pay salaries to themselves why. They take only distributions of profits, thus avoiding all employment taxes. These taxpayers, however, are at risk of paying penalties if they are audited by the IRS. The IRS requires that S-corporation owners running a business will pay a "reasonable salary."

Now you realize that you can maximize tax savings through the creation of an S-corporation and pay yourself the smallest wage that qualifies as "reasonable". So what is reasonable? The IRS does not give specific figures. Moreover, there is very little case law to provide guidance by example. There are factors that are considered in the determination of reasonable wages.

Courts would look at the work done by the owner with respect to other persons performing similar functions. Courts will also consider the contribution of capital by the owners. If profits are attributable to capital investments rather than the owner's efforts, a greater allocation to distribution of profits is guaranteed. Moreover, if the profits are attributable to the leverage offered by employees, rather than their professional services of the owner, always a budget more towards the distribution of profits is guaranteed.

Assuming $ 50,000 per year is a reasonable salary, you could save $ 9387 in taxes, creating the S-corporation and pay you this salary from profit of $ 200,000 .......