Self-Employment Tax

Is Income Of An LLC Member Subject To Self-Employment Tax?

Unlike corporations which are treated as separate tax entities, the IRS and the Tax Code treat LLCs as “pass-through” entities. Thus, an LLC or “Limited Liability Company” is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. The IRS treats an LLC like a sole proprietorship or a partnership, depending on the number of members.

Christine C. Peterson, et al. v. Commissioner of IRS – Retirement Payments May Be Deferred Compensation

In a case of first impression, the Eleventh Circuit Court of Appeals held that payments from a Mary Kay retirement program to one of its retired salespersons were earnings subject to self-employment tax. This holding was based upon the fact that the plan under which the payments had been made was amended by Mary Kay to comply with the new tax rules under I.R.C. § 409A. (Peterson v. Commissioner No. 14-15773 (11th Cir. May 24, 2016). The IRS considered the payments as nonqualified deferred income from a § 409A plan, therefore subject to the provisions of § 409A, and assessed the Petersons a hefty bill for unpaid self-employment tax.

Excluding Self-Employment Income Under I.R.C. §1402(a)(3)(C)

Taxpayers earn self-employment income which is net income “from any trade or business carried on by such individual” under I.R.C. §1402. The meaning of “trade or business” is the same as it is under I.R.C. §162. The Supreme Court has “defined a trade or business as an activity engaged in for income or profit and performed with continuity and regularity. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).”

There is an exclusion from inclusion of income from the sale of property in self-employment income under IRC §1402(a)(3)(C) which provides:

(3) there shall be excluded any gain or loss—

Tax Breaks for Home-Based Businesses

Home-based business owners may not be aware that there are many ways to cut their tax bill. Many tax breaks are available for home-based businesses, here are some tips for taking advantage of these allowable business expenses.

Business structure

Sole proprietors must pay self-employment taxes. Forming a corporation or another business entity like an LLC and electing to treat it as an S Corporation may help reduce self-employment taxes. S Corporations allow home-business owners the opportunity to pay themselves a “reasonable salary” and treat any remaining profits as a profit distribution, both of which are not subject to self-employment taxes.

Deductions And Long-Term Care Insurance

A long-term care insurance premium, or a part thereof, may be deductible from federal income taxes as a medical expense. Acknowledging that it can’t assume the primary role in paying for Americans’ long-term health care, the federal government offers tax incentives to encourage middle-aged and older taxpayers to assume responsibility for their future health care needs. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) included provisions for favorable tax treatment of Long-Term Care insurance (LTCi) contracts that meet statutory qualifications.

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