Self-Employment Tax

Individuals who are owners of an entity may be required to pay self-employment taxes in the combined amount of 15.3% on their earnings subject to a cap. A sole proprietor pays self employment tax on all of the sole proprietorship’s income and loss.

A general partner in partnerships pays self-employment tax on the guaranteed payments he receives from the partnership and his distributive share of the partnership’s income and loss. A limited partner pays self-employment tax only on guaranteed payments he receives from the partnership as compensation for services he renders for the partnership.

A member of an LLC that chooses to be disregarded as an entity, treated like a partnership, or an S corporation, pays self-employment tax on the guaranteed payments he receives from the LLC and his distributive share of the LLC’s income and loss if the member participates in the management of the LLC. A member who does not participate in the management of the LLC pays self-employment tax only on guaranteed payments he receives from the LLC as compensation for services he renders to the LLC.

A shareholder of a C or S corporation does not pay self-employment tax on any amounts distributed, or allocations of income or loss made, by the corporation to its shareholders by virtue of their ownership interest in the corporation. The corporation and the shareholder pay employment tax on any wages paid to the shareholder as an employee of the corporation and a shareholder pays self-employment tax on any compensation he receives from the corporation for services rendered as an independent contractor to the organization.

- Debra J. Tucker, Esq. CPA
The Tucker Firm LLC