For non-US readers:
In the US, for those who are self-employed, there are many specific taxes. One particular tax is the confusingly named "The Self-Employment Tax".
Thus, if you are self-employed, you pay a number of specific taxes, all of which have various confusing names. (Here's a random example! The "Individual Shared Responsibility Payment" - !)
One particular tax, of the many that self-employed people pay, is the (confusingly named!) "The Self-Employment Tax".
So, this QA is in fact about that particular tax, "The Self-Employment Tax".
First I will explain how I believe self-employment tax works in the US:
- Sally makes $200,000 in the year. She is paid as a ordinary 1099 worker.
- She pays S.E. tax of about $20,000 on that.
(Note for overseas readers who are following along. So, among the various/many taxes she pays, >>one<< of them is the "S.E. tax" - $20,000 in the example. This QA is only about the "S.E. tax" specifically.)
~ Alternately ~
- Sally sets up an LLC which will be treated as an SCorp (or, she just sets up an Scorp)
- The SCorp gets $200,000
- The SCorp pays her $100,000 income
- The SCorp gives her $100,000 profit distribution
- Sally pays only $10,000 S.E. tax (ie, on the 100k income portion)
- Sally undeniably seems to save $10,000
What is my question:
it seems "too good to be true." (Especially in the USA!)
In fact, is the above actually correct?
So my exact question: for Sally who makes $200,000 in 1099 income as her total income, is it a flat fact that she can save (about) $10,000 simply by using the "SCorp dodge" described?
Are there any gotchyas, or other aspects that in fact eliminate the huge gain?
(I have already heard that the "salary" (so, 100k above) has to be "reasonable", let's assume that in the example given it is "reasonable". I also appreciate there are other unrelated benefits in the US to the corp approach - say, simply being able to deduct expenses better, etc etc. Here I'm just asking about the "Self-employment tax dodge!")