The earnings from an S-Corporation that pass through to its owners is still not subject to the Self-Employment Tax. This break may not last much longer since President Obama has mentioned that he would like to eliminate this break. The SE tax is 15.3 percent of the net earnings from self-employment, however, the earnings that passes through from an S-corporation is not considered self-employment income currently.
This can lead to planning opportunities and is one of the best advantages to take for small business owners.
So what is the catch. The owner must still take a "reasonable salary" from the S-corporation. This term is not defined by the tax code. This is where an owner should not get too "greedy." The salary should be based on what the owner should reasonably receive if the had to pay an outside third party. There are many guidelines that practitioners use in this area to make sure an owner is receiving a reasonable salary. If you decide to go this direction in your planning, make sure you consult with a tax professional.
