No, for tax purposes, an S Corp owner who works in the business is generally not considered self-employed; you are a shareholder-employee who receives a W-2 salary and pays payroll taxes on that salary, unlike sole proprietors who pay self-employment tax (FICA) on all profits. You are an employee of your own company, and any remaining profits taken as distributions are not subject to those payroll taxes, offering a key tax advantage, but you must pay yourself a "reasonable salary" first.
Courts have consistently held S corporation officers/shareholders who provide more than minor services to their corporation and receive, or are entitled to receive, compensation are subject to federal employment taxes.
Basically, owners and shareholders of corporation business structures are not considered self-employed. Regardless of how you are self-employed, the primary characteristic is that your business cannot expand beyond your individual capacity.
If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. For more information on your tax obligations if you are self-employed (an independent contractor), see our Self-employed individuals tax center.
An S corporation is a corporation that elects to be taxed as a pass-through entity. Income, losses, deductions, and credits flow through to the shareholders, partners or members. They then report these items on their personal tax return.
Shareholders must include their share of the income on their tax return whether or not it is distributed to them. Unlike most partnership income, S corporation income isn't self-employment income and isn't subject to self-employment tax.
The "2% rule" for S Corporations treats shareholders owning more than 2% of the company's stock (or voting power) differently for fringe benefits, classifying them like partners in a partnership, not regular employees; this means benefits like health insurance premiums paid by the S Corp must be included as taxable wages on their W-2, rather than being tax-free, though the shareholder can often deduct these premiums as an "above-the-line" deduction. This rule prevents them from participating in tax-advantaged Section 125 cafeteria plans, making benefits like Health FSAs unavailable on a pre-tax basis.
Self-employment means you're in business for yourself, not an employee, working as a sole proprietor, independent contractor, freelancer, or partner, controlling your work hours, paying your own taxes (like self-employment tax for Social Security/Medicare), and taking on profit/loss risk, encompassing various gigs from ride-sharing to running a full business.
The tax benefit for S corporations is that business income, as well as many tax deductions, credits, and losses, are passed through to the owners, rather than being taxed at the corporate level.
Limited liability company (LLC)
Profits and losses can get passed through to your personal income without facing corporate taxes. However, members of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security. LLCs can have a limited life in many states.
How do S corp owners pay themselves? Those who are both an employee and a shareholder in an S corporation generally pay themselves via distributions and a salary. The latter is necessary if the individual performs more than minor services for the business.
Owners of an S corporation are known as shareholders or stockholders. Owners of a S corporation will be shielded from being personally liable for corporations' debts and liabilities. However, an S corporation cannot have more than 100 shareholders, though a husband and wife are automatically treated as one shareholder.
Organizing a business as an S-corporation can help you avoid higher self-employment taxes by classifying some income as salary and some as a distribution. That way, you will only owe self-employment taxes on the salary portion.
A limited company is a separate legal entity from its owners. The company itself is responsible for its debts and liabilities. Owners can take on roles such as directors and shareholders. Directors are typically considered employees for tax purposes, while shareholders earn income through dividends.
For instance, S corporations are similar to traditional C corporations in how they are managed and owned. S corps have shareholders, directors, and officers. Shareholders own the company's stock.
S-Corp election lets you split your profits into “shareholder wages” (subject to 15.3% self-employment taxes) and “distributive share” (NOT subject to 15.3% self-employment taxes). Active owners in an S-Corp must pay themselves a reasonable salary, but realize a 15.3% savings on the rest of their retained profits.
You're self-employed for this purpose if you're a sole proprietor (including an independent contractor), a partner in a partnership (including a member of a multi-member limited liability company (LLC) that is treated as a partnership for federal tax purposes) or are otherwise in business for yourself.
Types of proof of income documents
Choose the Right Business Structure
Sole proprietors and single-member LLCs pay full self-employment tax on all profits. However, if your income exceeds a certain threshold, switching to an S Corporation (S-Corp) could significantly reduce your SE taxes.
S-Corp reasonable salary is the market-rate compensation you must pay yourself before taking distributions, typically ranging from $40,000-$150,000+, depending on your role, industry, and location. The IRS requires this to prevent payroll tax avoidance, with penalties reaching 20% plus interest for non-compliance.
Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.