Question

Josh is the sole shareholder of an S Corporation. Each year, he draws a salary and receives a distribution of profits from the corporation. Which of the following is true?

a. Josh's salary will be treated as self employed income and must be reported on schedule c.
b. The S corporation may deduct the cost of health insurance and other fringe benefits provided to Josh.
c. Josh's share of the profits will not be subject to social security or Medicare taxes.
d. Josh may not hire non-shareholder employees and still maintain his S Corporation status.

Answer 1

Correct answer is c - Josh's share of the profits will not be subject to socual security or Medicare Taxes.

An S corporation shareholder who performs more than minor services for the corporation will be its employee for tax purposes, as well as a shareholder. In effect, an active shareholder in a S corporation wears at least two hats: as a shareholder (owner) of the corporation, and as an employee of that corporation. This allows for savings on Social Security and Medicare taxes because such taxes need not be paid on distributions of earnings and profits from the corporation to its shareholders. Thus, to the extent they pay themselves shareholder distributions instead of employee salary, S corporation shareholder/employees can save big money on payroll taxes.