The Money Trail for S-Corp Elections

By Jason Watson (Google+)
Posted August 18, 2014

So, when your partnership, LLC or corporation is taxed as an S-Corp you are considered both an employee and a shareholder (think investor). As an employee, your income is subjected to all the usual taxes that you would see on a paystub- federal taxes, state taxes, Social Security taxes, Medicare taxes, unemployment and disability. However, as a shareholder or investor, you are simply getting a return on your investment, much like a dividend. That income, as the Romneys, Gates and Buffets of the world enjoy, is a form of investment income and therefore is not subjected to self-employment taxes (tiny exception for income over $200,000 (single) or $250,000 (married) where Medicare surtax is charged).

And when we say self-employment taxes, we are really talking about Social Security and Medicare taxes. From a sole proprietor perspective, they are self-employment taxes. From an employee perspective, they are Social Security (FICA) and Medicare taxes. Same thing.

Let’s look at another visual in terms of how the money travels (yes, picture page!)-

Taxpayer’s Comprehensive Guide to LLCs and S Corps
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