What differences in application of the self-employment tax exist between an S corporation and an LLC?
* Since distributions from subchapter S corporations (i.e., dividends) are not subject to self-employment tax, wages can be reduced a corresponding amount in certain justifiable circumstances, with resulting FICA tax savings. The optimal situation for this is when a portion of the income can be attributed to a return of the capital invested. Consequently, dividends from an S corporation are much more favorable to its stockholders than similar distributions from a closely held C corporation. * Whether or not income from an LLC will be subject to the self-employment tax at the member level is dependent upon whether the member would otherwise qualify as a limited partner in a limited partnership. The general rule is that an individual is treated as a limited partner under IRC section 1402 (and hence not subject to self-employment tax on the individual’s distributive share of income) unless the individual– * has personal liability for the debts of or claims against the LLC by reason of be
