Small Business Taxes - How to Pay Less Self-Employment Tax

Assuming that you can pay yourself reasonable compensation of $35,000 salary, only that salary will be subject to the 15.3% SE tax (which will now be called "payroll tax" rather than SE tax). The remaining $25,000 in profit can still be paid to you whenever you like, but it will not be subject to payroll tax, because only wages/salary are subject to payroll tax in a corporation. Second, now that you are paying yourself wages/salary as an employee of a corporation, the corporation must do all the paperwork that comes with payroll. You must issue yourself bona fide paychecks (which means that withholding calculations must be done). You must also file all the required federal, state and local payroll tax returns, and make all the required federal, state and local payroll tax payments. This can be quite a mountain of paperwork and you should probably outsource these payroll tasks. If you're new to the world of small business taxes, here's a quick review of self-employment tax. Sole proprietors and those taxed like sole proprietors (i.e. partnership partners and LLC owners who have not chosen to be taxed like a corporation) must pay 15.3% of their business profit in SE tax to the federal government. This consists of 12.4% social security tax and 2.9% Medicare tax. In effect, it is the self-employed person's version of the employee/employee federal payroll tax of 15.3%. But here's where frustration begins to rear its ugly head: employees and employers each pay one-half of the 15.3%. The self-employed person must pay the entire 15.3%.