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Suppose I have an LLC and for simplicity's sake I'm the only member and I choose to be taxed as an S Corp. I fill out a W2, becoming an employee-owner of the LLC and I pay myself 50% of the LLC's earnings.

From what I can gather, I must pay Social Security and Medicare tax on my salary but the LLC's retained profits are not subject to these taxes.

If the LLC is a "pass-through entity" (please correct my terminology if wrong), meaning all of its profits/losses personally belong to its members, then won't the profit not paid as salary become my income and be subject to Medicare/Social Security tax? Or is it only subject to income tax?

marked as duplicate by TTT, Nathan L united-states Sep 24 '18 at 15:10

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  • But, say I don't want to distribute it? – papiro Sep 24 '18 at 16:50
  • An LLC taxed as an S-corp is not a pass through entity. – gaefan Sep 24 '18 at 17:25
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    Yes, the company needs to issue shareholders a schedule K1 at year end. You will pay income tax on the net earnings of the company regardless of whether or not the money is distributed. But you won't pay payroll taxes on that amount, just income tax. Be careful about the rules for "reasonable compensation". – Rocky Sep 24 '18 at 19:54
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    @papiro, I'm wrong. Sorry about that. – gaefan Sep 24 '18 at 20:31
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    @Rocky answers the question, but it is not answered in the question that this one supposedly is a duplicate of. – gaefan Sep 24 '18 at 20:36