Not Really a Loophole
First off it is not really a loophole and it has to do with how the owners of an S corporation take money out of their business.
Shareholders of an S corporation are considered employees of their S corporation. That being said, the owners are taxed the same way any employee of any other business is.
How Does This Work?
When someone sets up an S corp they pay most of their earning to the corporation. Then they pay a bit of the income to themselves. The income paid to the S corp owner is subject to payroll taxes, but the income paid to the corporation is not. The one stipulation is that the earnings paid to the owner must be a reasonable income.
The Future of the “Loophole”
Some governing bodies are hoping to close it, so S corporation shareholders beware!
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