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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 said corporation. That being said, they 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 themselves is subject to payroll taxes but the income paid to the corporation is not. The one stipulation is that the earning paid to themselves 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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