Employees, employers, and self-employed individuals all pay federal employment taxes—meaning Social Securityand Medicare taxes—and the hits get bigger every year.
Here’s an update, along with suggestions on how to mitigate the pain.
How High Can My Social Security Tax Bill Be?
It may already be a lot bigger than you think!
If you are an employee, your wages are hit with the 12.4 percent Social Security tax, up to the annual wage ceiling.Half of the Social Security tax bill—equal to 6.2 percent—is withheld from your paychecks. The other 6.2 percent ispaid by your employer, so you never actually see the second half go out of your pocket. But it still goes.
The Social Security tax wage ceiling for 2024 is $168,600 (up from $160,200 for 2023). If your wages meet orexceed the ceiling, the Social Security tax hit for 2024 will be a whopping $20,906 (12.4 percent x $168,600). Asstated, half of that comes out of your paychecks. Your employer pays the other half.
The wage ceiling is projected to rise to $174,900 next year. The projected future-year increases are listed later inthis article. You will not be pleased with the numbers.
Worse If You’re Self-Employed
If you are self-employed (as a sole proprietor, partner, or LLC member who is treated as a sole proprietor or partnerfor tax purposes), you know all too well how hard the Social Security tax can hit. That’s because you must pay theentire Social Security tax bill out of your own pocket, based on your net income from Schedule C multiplied by0.9235 on Schedule SE. For 2024, the Social Security tax ceiling for net self-employment income (after multiplyingby 0.9235) is $168,600 (same as the wage ceiling for employees).
So, if your net self-employment income for 2024 is $168,600 or more after the multiplication, you’ll get socked withthe maximum $20,906 Social Security tax hit (12.4 percent x $168,600). Oof!
Projected Social Security Tax Ceilings for 2025-2033
The Social Security tax hit on your 2024 income is expensive enough, but it’s only going to get worse in futureyears—much worse, according to the Social Security Administration (SSA) projections.
That’s because the Social Security tax wage and self-employment income ceiling will continue to go up based onthe inflation factor that’s used to justify the increases. In turn, maximum Social Security tax bills for high-earnerswill go up.
The latest SSA projections for Social Security tax ceilings for 2025-2033 are shown below, based on the so-calledintermediate case numbers.
- $174,900 for 2025
- $181,800 for 2026
- $188,100 for 2027
- $195,900 for 2028
- $204,000 for 2029
- $213,600 for 2030
- $222,900 for 2031
- $232,500 for 2032
- $242,700 for 2033
These projected ceilings are bad enough. Could they get worse?
Absolutely, because the SSA projections sometimes undershoot the actual numbers. But let’s say the projectednumbers pan out. If so, the maximum Social Security tax hit on wages and net self-employment income in 2033(after the multiplication) will be a whopping $30,095 (12.4 percent x $242,700). Yikes!
And Then There’s the Medicare Tax
The Medicare health insurance tax is 2.9 percent. If you are an employee, 1.45 percent comes out of yourpaychecks and another 1.45 percent is paid by your employer. If you’re self-employed, you pay the entire 2.9percent out of your own pocket.
So, the combined federal payroll tax on the first $168,600 of wages or net self-employment income (aftermultiplying by 0.9235) is a painful 15.3 percent (12.4 percent for the Social Security tax and 2.9 percent for theMedicare tax).
For employees, the Social Security and Medicare taxes are collectively called “FICA tax.” To be clear, on the first$168,600 of 2024 wage income, half of the FICA tax, or 7.65 percent, is withheld from your wages and the other7.65 percent is paid by your employer—for a combined rate of 15.3 percent.
If you are self-employed, the 15.3 percent self-employment tax on the first $168,600 of net self-employmentincome (after multiplying by 0.9235) is composed of the 12.4 percent Social Security tax and the 2.9 percentMedicare tax. You, because you are self-employed, pay the entire 15.3 percent out of your own pocket.
Once the Social Security tax ceiling for 2024 is surpassed, the 12.4 percent Social Security tax cuts out, but the 2.9percent Medicare tax continues to infinity and beyond.
Last (and Least) Is the 0.9 Percent Additional Medicare Tax
We are not done yet, because the 0.9 percent additional Medicare tax kicks in when your wages or net self-employment income exceeds the applicable threshold:
$200,000 for singles and heads of households
$250,000 for married joint-filing couples
$125,000 if you use married-filing-separately status
Above these thresholds, the 0.9 percent additional Medicare tax continues to infinity and beyond. If your wageincome exceeds the applicable threshold, the 0.9 percent tax is withheld from your excess wages.
If you have two jobs, or have both wages and self-employment income, or if you have a spouse who has wages orself-employment income, the wage withholding (if any) may not cover your liability for the 0.9 percent tax. In thisscenario, things can get a bit complicated, as illustrated in Examples 1, 2, and 3 below.
Calculate the 0.9 percent tax that you owe (if any) on IRS Form 8959 (Additional Medicare Tax), and pay the taxout of your own pocket.
Example 1. Single with wage and self-employment income
You are a single filer with $130,000 of wages and $145,000 of net self-employment income (aftermultiplying by 0.9235) from your sole proprietorship side gig.
Since your wages don’t exceed $200,000, your employer does not withhold anything for the 0.9 percenttax. You have a total of $275,000 in wages and net self-employment income ($130,000 + $145,000), so youowe the 0.9 percent tax on $75,000 ($275,000 – the $200,000 threshold).
Calculate the tax on Form 8959, file it with your Form 1040, and pay the tax.
Example 2. Married filing separately with wage and self-employment income
You use married-filing-separately status. You earn $200,000 in wages and $150,000 in net self-employmentincome (after multiplying by 0.9235) from your sole proprietorship side gig.
Since your wages don’t exceed $200,000, your employer does not withhold anything for the 0.9 percenttax. You have a total of $350,000 in wages and net self-employment income ($200,000 + $150,000), so youowe the 0.9 percent tax on $225,000 ($350,000 – the $125,000 threshold).
Calculate the tax on Form 8959, file it with your Form 1040, and pay the tax.
Example 3. Married filing jointly
You are married and file jointly. You have $150,000 in wages and your spouse has $175,000 in net self-employment income (after multiplying by 0.9235).
Since your wages don’t exceed $200,000, your employer does not withhold anything for the 0.9 percenttax. You and your spouse have a total of $325,000 of wages and net self-employment income ($150,000 +$175,000), so you owe the 0.9 percent tax on $75,000 ($325,000 – the $250,000 threshold).
Calculate the tax on Form 8959, file it with your Form 1040, and pay the tax.
If You Are Self-Employed: Ways to Reduce the Self-Employment Tax Hit
As the owner of an unincorporated small business, you may be at the tipping point regarding your self-employmenttax bills.
As stated earlier, for 2024, the self-employment tax rate is 15.3 percent on the first $168,600 of net self-employment income (from Schedule C multiplied by 0.9235): 12.4 percent for the Social Security tax component ofthe self-employment tax, and 2.9 percent for the Medicare tax component.
Above the $168,600 Social Security tax ceiling, the Medicare tax component continues at a 2.9 percent rate beforeincreasing to 3.8 percent at higher levels of net self-employment income thanks to the additional 0.9 percentMedicare tax explained earlier. These federal employment taxes can add up to big bucks.
According to the latest SSA projections listed earlier, the Social Security tax ceilings for future years are only goingto go higher, so your self-employment tax hit is only going to get worse if your business continues to be quiteprofitable. Ugh. What can you do? Here are some thoughts.
Strategy No. 1: Operate Your Business as an S Corporation
For employees, the Social Security and Medicare taxes, which add up to 15.3 percent of the first $168,600 of 2024wage income, come in the form of the FICA tax. Half of the FICA tax is withheld from employee paychecks. Theemployer then pays in matching amounts.
So, the combined FICA withholding plus employer rate for the Social Security tax is 12.4 percent, and thecombined FICA withholding plus employer rate for the Medicare tax is 2.9 percent. At higher wage levels, theadditional 0.9 percent Medicare tax kicks in.
Federal Employment Taxes Are Owed Only on Salary
The good news is that for an S corporation shareholder-employee, only wages paid to the individual are subject tothe aforementioned federal employment taxes (Social Security tax, Medicare tax, and the additional 0.9 percentMedicare tax).
Taxable income passed through to an S corporation shareholder and cash distributions paid to a shareholder arenot subject to federal employment taxes.
So, operating your business as an S corporation is potentially more advantageous than operating as a soleproprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, or a multi-member LLC treated as a partnership for tax purposes.
That’s because an S corporation can follow the tax-smart strategy of paying modest salaries to its shareholder-employees (like you) while distributing most or all of the remaining corporate cash flow as federal-employment-tax-free distributions to its shareholder-employees (like you).
Example 4. Sole proprietorship or single-member LLC converts to an S corporation
You are a married joint-filer. You currently operate your business as a single-member LLC that’s treated asa sole proprietorship for tax purposes.
For 2024, you expect the business to earn $250,000 of Schedule C net income before the contribution toyour SEP account (assume $20,000) and medical insurance premiums (assume $15,000). For self-employment tax purposes, your net self-employment income is $230,875 ($250,000 from Schedule Cmultiplied by the factor of 0.9235).
If you maintain sole proprietorship status for 2024, you will have a self-employment tax bill of $27,602.
Note that your net self-employment income is not reduced by deductible contributions to your SEP accountor by the deduction for self-employed health insurance premiums.
If you had converted your business into an S corporation, you would owe federal employment taxes only onyour salary. Assume you can make the case that an $80,000 salary is reasonable for the work you perform.
For 2024, the federal employment tax hit would be $12,240 (15.3 percent x $80,000) compared with$27,602 if your business is still operated as a sole proprietorship. Wow! That’s a big difference!
Assume your S corporation makes a $20,000 deductible contribution to your SEP account (25 percent ofyour salary) and pays $15,000 for your health insurance. You can pay out the remaining corporate cashflow to yourself as federal-employment-tax-free distributions.
Bottom line.
For 2024, operating as an S corporation instead of as a single-member LLC treated as a soleproprietorship would save you a cool $15,362 in federal employment taxes ($27,602 versus $12,240). Andthis is not just a one-time benefit.
You can collect similar federal employment tax savings (or better) in future years if your business maintainsor exceeds its current level of profitability and the tax rules remain the same.
Beware of Retirement Plan Side Effect
Paying yourself a modest salary as an S corporation shareholder-employee has the potentially unfavorable sideeffect of reducing allowable annual deductible contributions to your tax-favored retirement account.
If the S corporation maintains a SEP or garden-variety profit-sharing plan, the maximum deductible contribution toyour account is 25 percent of salary (subject to an absolute maximum of $69,000 for 2024).
So, the lower your salary, the lower the maximum contribution to the account.
But if you have your S corporation set up a 401(k) plan, paying modest salaries to shareholder-employees won’tpreclude relatively generous contributions to the plan, because a 401(k) plan allows contributions equal to a muchlarger percentage of your salary.
Mechanics of Converting to S Corporation Status
To convert an existing domestic LLC into an entity that will be treated as an S corporation for federal tax purposes,it may not even be necessary to go through the legal step of incorporation. That’s because the IRS allows a single-member LLC or multi-member LLC that otherwise meets the S corporation qualification rules to elect S corporationstatus simply by filing Form 2553 (Election by a Small Business Corporation).
In this scenario, there’s no need to file Form 8832 (Entity Classification Election) in order to reclassify an electingsingle-member LLC or multi-member LLC into S corporation status.
You must make the S election by filing Form 2553 no later than two months and 15 days after the beginning of thetax year for which you want the election to take effect. So, it’s too late for this year. But you could make an electionby March 15, 2025, to be effective for your new S corporation’s 2025 calendar tax year.
To convert an existing sole proprietorship or partnership into an S corporation, you must form a corporation underapplicable state law and contribute the business assets to the new corporation as necessary.
Then an S election must be made for the new corporation by filing Form 2553 no later than two months and 15days after the beginning of the tax year for which the election is to take effect. As stated above, it’s too late for2024. But you could make an election by March 15, 2025, to be effective for calendar tax year 2025.
IRS Knows This Game, but Does It Matter?
As you can see, an S corporation can serve as a vehicle for mitigating federal employment taxes by paying modestbut reasonable salaries to shareholder-employees. But the tax-saving advantage is lost if the IRS successfullyasserts that the S corporation cash distributions are actually disguised salary payments subject to federalemployment taxes. Then the corporation can be hit with back employment taxes, interest, and penalties. Not good!
Way back in 2002, now 22 years ago, a Treasury Inspector General for Tax Administration (TIGTA) report said IRSauditors should be devoting substantial attention to the issue of understated compensation for S corporationshareholder-employees. Has this happened? No. Audit rates for S corporation are still microscopic.
According to the latest IRS Data Book (which presents statistics from the government’s 2023 fiscal year that endedon September 30, 2023), 5,120,522 S corporation returns were filed for tax year 2021 (the latest year for whichstatistics are available). For that tax year, only 4,819 audits of S corporation returns were closed or underwayduring the government’s 2023 fiscal year. That’s an audit rate of 0.094 percent, or about 1 audit for every 1,064returns.
“What about employment tax returns?” you ask. Well, 34,798,162 returns were filed for the 2021 tax year, but only9,173 audits were closed or underway during the government’s 2023 fiscal year.
That’s a microscopic audit rate.Good to know!
Thanks to an infusion of many billions into the IRS budget, these near-zero audit rates may go up, but we wouldnot bet much on meaningful increases.
Bottom line.
While the audit risk for an S corporation’s federal employment tax positions may be microscopic, youshould still be prepared to defend stated shareholder-employee salary amounts as being reasonable (if only just)for the work performed.
Courts Have Weighed in Too Several court decisions have opined on the subject of paying modest salaries to S corporation shareholder-employees in order to mitigate federal employment taxes. These decisions make it clear that purported Scorporation cash distributions can be recharacterized as disguised shareholder-employee compensation, subject tofederal employment taxes, when stated compensation payments are unreasonably low.
The decisions are not very informative because they involve egregious compensation understatements.
Bottom line.
Your S corporation is unlikely to lose on this issue if you gather evidence to demonstrate thatoutsiders could be hired to perform the same work for salaries similar to the stated (modest) salaries paid to yourshareholder-employee(s).
No Free Lunch
Operating as an S corporation triggers some tax complications.
You must file an annual federal income tax return on Form 1120-S and maybe an annual stateincome tax return too.
You must scrutinize transactions between your S corporation and its shareholder(s) (including assettransfers upon formation) for potential tax consequences.
You must respect state-law corporation requirements, such as having board of director meetings andkeeping minutes.
However, after considering the federal employment tax savings, you may find the extra hassle to be well worth it.
What About Using a C Corporation?It’s worth considering. As with S corporations, ederal employment taxes for C corporation shareholder-employees are due only on wagepayments.
It’s likely that payouts of C corporation cash flow will be recharacterized by the IRS as taxable dividends and hitwith the dreaded problem of double taxation. So, as a general rule, we probably don’t want to use a C corporationwhere most or all of the corporate cash flow will be paid out to the shareholder(s).
But as long as we have the flat 21 percent corporate federal income tax rate, you should run the numbers for yourspecific situation.
Strategy No. 2: Defeat the Argument That Your Unincorporated Husband-WifeBusiness Is a Partnership
The issue of whether an unincorporated husband-wife business must be treated as a partnership (or not) forfederal tax purposes is a big deal because it can have a major impact on the married couple’s self-employment taxliability.
As stated earlier, for 2024, the first $168,600 of an individual’s net self-employment income, including a spouse’snet self-employment income from a husband-wife partnership, is hit with the maximum 15.3 percent self-employment tax rate. Ouch!
Partnerships, including husband-wife partnerships, must also file annual partnership tax returns on Form 1065along with the related Schedules K-1. Yuck!
Example 5. Self-employed tax hit on husband-wife partnership
In 2024, your husband-wife partnership will produce $250,000 of net self-employment income (afterapplying the 0.9235 factor). Assume the $250,000 is properly split 50/50 between you and your spouse.
In this situation, each spouse owes $19,125 of self-employment tax [($125,000 x 0.153) = $19,125], for acombined total of $38,250. Oof!
The problem with the husband-wife partnership scenario in this example is that the maximum 15.3 percentself-employment tax rate hits $125,000 of net self-employment income not once but twice: once on yourSchedule SE and again on your spouse’s separate Schedule SE. Not good!
The Truth AboutWhen Husband-Wife Partnerships Exist
Your friendly Internal Revenue Service wants to create the impression that involvement by you and your spouse inan unincorporated business activity usually creates a partnership for federal tax purposes.
For example, IRS Publication 334 (Tax Guide for Small Business) says the following:
If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, youare partners in a partnership, whether or not you have a formal partnership agreement. Do not use Schedule C.Instead, file Form 1065, U.S. Return of Partnership Income.
But in many (if not most) cases, the IRS will have a tough time making the husband-wife partnership argument.Consider the following direct quote from IRS Private Letter Ruling 8742007:
Whether parties have formed a joint venture is a question of fact to be determined by reference to the sameprinciples that govern the question of whether persons have formed a partnership which is to be accordedrecognition for tax purposes.
Therefore, while all circumstances are to be considered, the essential question is whether the parties intended to,and did infact, join together for the present conduct of an undertaking or enterprise.
The following factors, none of which is conclusiv
e, are evidence of this intent:
- the agreement of the parties and their conduct in executing its terms;
- the contributions, if any, that each party makes to the venture;
- control over the income and capital of the venture and the right to make withdrawals;
- whether the parties are co-proprietors who share in net profits and who have an obligation to sharelosses; and
- whetherthe business was conducted in the joint names of the parties and was represented to be apartnership.
Bottom line
In many (if not most) situations where both spouses have some involvement in an activity that hasbeen treated as a sole proprietorship—or in an activity that has been operated using a disregarded single-memberLLC treated as a sole proprietorship for tax purposes—only some of the five factors listed in Private Letter Ruling8742007 will be present.
Therefore, in many such cases, the IRS may be unsuccessful in arguing that a husband-wife partnership orhusband-wife LLC exists.
Regardless of the presence or absence of the other factors listed above, the husband-wife partnership or LLCargument is especially weak when you and your spouse have no discernible partnership agreement, and
you have not represented the business as a partnership to third parties (such as your bank and yourclients).
Beware of Penalty for Failure to File Partnership Returns
The penalty for failing to file a partnership return that’s due to be filed in 2025 on Form 1065 or for failing to providerequired information on the return (when a return is required) is $245 per partner per month.
The penalty can beassessed for a maximum of 12 months.
For example, the maximum penalty for failing to file a calendar-year 2024 Form 1065 for an unincorporatedhusband-wife business that legitimately must be treated as a husband-wife partnership would be $5,880 (2 x $245x 12).
The existence of this penalty obviously favors filing husband-wife partnership returns in borderline situations.
Key point.
Before the IRS partnership audit rules were changed for 2018 and beyond, IRS Revenue Procedure84-35 provided an exemption from the failure-to-file penalty.
The exemption was available only to domestic partnerships with 10 or fewer partners when all partners havereported their proportionate shares of income and deductions on timely filed returns. So this exemption wouldusually cover husband-wife partnerships that fail to file partnership returns.
It is unclear whether this relief is still available under the new partnership audit regime, but we think it is—and wethink the IRS will soon issue guidance to clarify that.
Strategy No. 3: Take Advantage of the Special Rule for Husband-WifeBusinesses in Community Property States
Here is a wide-open self-employment tax-saving opportunity for husband-wife businesses in community propertystates.
IRS Revenue Procedure 2002-69 stipulates that the IRS will not make the husband-wife partnership (or thehusband-wife LLC treated as a partnership) argument against a qualified entity in a community property state.
Instead, the IRS will respect your treatment of the qualified entity as either.
- a sole proprietorship (which would include a single-member LLC treated as a sole proprietorship fortax purposes) or
- a husband-wife partnership (which would include a husband-wife LLC treated as a husband-wifepartnership for tax purposes).
To clarify, if you and your spouse treat your unincorporated business as a sole proprietorship for federal taxpurposes (including for self-employment tax purposes), the IRS will not object, even when both you and yourspouse are active in the business.
Alternatively, if you and your spouse treat your unincorporated business as a husband-wife partnership for federaltax purposes (including for self-employment tax purposes) and file partnership returns, the IRS will not object tothat treatment either.
You can choose the best self-employed tax-saving option, as we will soon illustrate with some examples.
Qualified Entities
The special rule offered by Revenue Procedure 2002-69 is limited to qualified entities that meet all three of thefollowing requirements:
The entity is wholly owned by husband and wife as community property under the laws of a state,foreign country, or U.S. possession.
No person other than the husband or wife (or both) would be considered an owner for federal taxpurposes.
The entity is not treated as a corporation under the check-the-box entity classification rules of IRSRegulation 301.7701-2.
Revenue Procedure 2002-69 also says:
A change in reporting position will be treated for federal tax purposes as aconversion of the entity.
So that clearly includes for self-employment tax purposes.
Self- Employment Tax Savings:
Examples
Consider the following examples to see how the special rule offered by Revenue Procedure 2002-69 can cut yourself-employment tax bills.
Example 6. Conversion to sole proprietorship
Pursuant to Revenue Procedure 2002-69 and effective for your 2024 tax year, you and your spouse—married residents of a community property state who file jointly—convert your former 50/50 husband-wifepartnership (or 50/50 LLC treated as a 50/50 partnership for tax purposes) into a sole proprietorship (orsingle-member LLC treated as a sole proprietorship for tax purposes) belonging to you.
For 2024, the business will produce net self-employment income of $250,000 (after applying the 0.9235factor). Neither you nor your spouse have any 2024 wage income or additional self-employment incomefrom other sources.
The conversion to sole proprietorship status reduces your 2024 self-employment tax bill by $10,094.
You accomplish the conversion by liquidating the assets, if any, of your husband-wife partnership (LLC) intothe “new” post-conversion sole proprietorship (single-member LLC) considered to be owned by you. Inmost cases, the only federal income tax impact of the conversion will be ceasing to file Form 1065 andinstead filing Schedule C (or E or F, if appropriate) for the “new” post-conversion sole proprietorship (single-member LLC).
The self-employment tax savings from the conversion can be substantial, as this example illustrates. As abonus, you will no longer need to file Form 1065 partnership returns after the conversion.
Example 7.
Conversion to husband-wife partnership
You and your spouse are married residents of a community property state who file jointly. Before 2024, yourbusiness was always a sole proprietorship (or single-member LLC treated as a sole proprietorship for taxpurposes). For 2024, the business will generate $150,000 of net self-employment income (after applyingthe 0.9235 factor). Your spouse will earn a $200,000 salary in 2024 from an unrelated job.
Pursuant to Revenue Procedure 2002-69 and effective for tax year 2024, you convert your soleproprietorship (single-member LLC) into a 50/50 husband-wife partnership (or 50/50 LLC treated as ahusband-wife partnership for tax purposes). This action shifts $75,000 of net self-employment income fromyou to your spouse.
That reduces your self-employment tax bill by $11,475 ($75,000 x 15.3 percent). On your spouse’sSchedule SE, the $75,000 is taxed at only 2.9 percent, because your spouse’s wage income exceeds the$168,600 Social Security tax ceiling. So, your spouse owes self-employment tax of $2,175 ($75,000 x 2.9percent). This strategy saves you a net $9,300 ($11,475 – $2,175). Not bad!
The conversion is accomplished by contributing the assets (if any) of the sole proprietorship (single-member LLC) to the “new” post-conversion husband-wife partnership (LLC).
In most cases, the only federal income tax impact of the conversion will be ceasing to file Schedule C (or Eor F, if appropriate) and instead filing Form 1065 for the “new” post-conversion husband-wife partnership(LLC).
As illustrated by this example, the self-employment tax savings from a conversion can be substantial.
Effect of Conversions on 2023 and 2024 Returns
Remember: the self-employed “conversion tax savings” opportunities offered by Revenue Procedure 2002-69come with full IRS approval.
So, we are not talking about a risky strategy here. If your 2023 federal income tax return(s) have not yet been filed,ensure the conversion is reflected on your 2023 return(s). If you do a conversion for the 2024 tax year, incorporateit into your 2024 return(s).
Takeaways
Federal employment taxes, including Social Security and Medicare, continue to rise annually, impactingemployees, employers, and self-employed individuals. For 2024, the Social Security tax wage ceiling is $168,600,resulting in a potential tax hit of $20,906 for high-earners. This ceiling is projected to increase each year,significantly affecting future tax bills.
Self-employed individuals face the full brunt of the Social Security tax on their net income, with a 15.3 percent self-employment tax rate on the first $168,600 of net self-employment income in 2024. This includes 12.4 percent forSocial Security and 2.9 percent for Medicare, with the Social Security tax cutting off above the ceiling but theMedicare tax continuing indefinitely. Additionally, the 0.9 percent additional Medicare tax applies to incomeexceeding certain thresholds.
Strategies to Mitigate Self-Employment Tax Impact
1. Operate as an S Corporation
Only wages are subject to federal employment taxes.
Distribute remaining cash flow as federal-employment-tax-free distributions.
Potentially save significant amounts on federal employment taxes when compared with soleproprietorship or partnership structures.
2. Leverage the Community PropertyState Rule
Treat your business as a sole proprietorship or husband-wife partnership for federal tax purposes,based on IRS Revenue Procedure 2002-69.
Choose the option that provides the best self-employment tax savings for your situation.
3. Defeat Partnership Classification
Use some of the requirements for a partnership, found in IRS Private Letter Ruling 8742007, toavoid unnecessary partnership classification for unincorporated husband-wife businesses, reducingself-employment tax liability.
