Corporate Taxation

Corporate Taxation

Can corporate losses be deducted by the shareholders of a C corporation?
Can excessive passive investment income affect S corporation status?
How is a C corporation taxed?
How is an S corporation taxed?
Should I form an S-corporation for tax reasons?
What is self-employment tax?

An important issue to consider when deciding the structure of your business is self-employment tax. Self-employment (SE) tax is a 15.3% tax on income. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

The SE tax rate for business owners is 15.3% tax of the first $94,200 of income and 2.9% of everything over $94,200.


Type of Tax Tax Base Rate Maximum Tax
Social Security $94,200 12.4% $11,680.80
Medicare no limit 2.9% no limit


Normally these taxes are withheld by your employer. However, if you are self employed, it is your responsibility to pay them yourself.

S corporations have a significant advantage when it comes to the payment of SE taxes. In an S corporation, only the salary actually paid out an owner/employee as compensation for services is subject to SE tax. Any money left in the business for reinvestment or distributed to the shareholder as a dividend is not subject to payroll taxes…and not subject to self-employment tax.

Owners of sole proprietorships, partnerships and LLCs however, pay SE tax on their respective share of profits rather than salary. (Certain types of LLC income, however, are not subject to self-employment tax. For example, rentals from real estate and capital gains are not considered to be self-employment income, so real estate LLCs often need not be concerned with self-employment tax.)

Here’s an example: Say, this year, you have net income of $90,000 and pay yourself $60,000 in salary, leaving $30,000 in the business to pay for equipment. As a sole proprietor, you would pay self-employment tax on the full $90,000 ($90,000 x 15.3% = $13,770). But as an S corporation, you would only owe self-employment tax on the $60,000 in salary ($60,000 x 15.3% = $9,180), resulting in a savings of $4,590.

How is a professional corporation taxed?
What is franchise tax?
What is a fiscal year?
What is an Employer Identification Number (EIN)?
I have a Federal EIN for my existing business. Can I use the same one if I form a corporation?