ExpertMedium1 markMultiple Choice
CPA · Question 47 · Area III: Entity Tax Planning
A consultant expects to earn $200,000 net profit. They want to minimize Self-Employment (SE) tax. Which entity structure best achieves this goal?
A consultant expects to earn $200,000 net profit. They want to minimize Self-Employment (SE) tax. Which entity structure best achieves this goal?
Answer options:
A.
Sole Proprietorship
B.
S Corporation
C.
General Partnership
D.
Single Member LLC
How to approach this question
Compare SE tax exposure. S Corp allows splitting income between Salary (FICA taxed) and Distributions (Not FICA taxed). All others generally subject full active income to SE tax.
Full Answer
B.S Corporation✓ Correct
IRC §1402 vs S Corp rules. S Corp shareholders pay FICA only on wages. Remaining profit distributed is not subject to SE tax. Sole Props and General Partners pay SE tax on all net earnings.
Common mistakes
Thinking LLCs automatically save SE tax (they don't unless taxed as S Corp).
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