- Sometimes, yes.
- If a shareholder-employee earns enough income, then the accountant might declare part of the income to be W-2 wages and the balance to be a distribution of an S-Corp dividend.
- The W-2 wages portion is subject to payroll taxes, including FICA (Social Security) and Medicare taxes
- The S-Corp dividend is not subject to payroll taxes.
- The audit risk for the shareholder-employee is that if capital is not a material income-producing factor of the business, then the IRS or state revenue department may determine the salary to be unreasonably low, reclassify part or all the dividend as salary and assess penalties for failure to pay payroll taxes.
- On the other hand, if the LLC keeps its default classification as a disregarded entity or partnership, then the IRS will classify all income of the LLC as self-employment, which is subject to self-employment tax but not other payroll taxes.
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