Kutchins, Robbins & Diamond, Ltd. Certified Public Accountants and Advisors

S Election to Save Employment Taxes

The S election is generally thought of as a tool to achieve pass-through taxation of C corporation income and avoid the double tax.

Electing Subchapter S treatment may also be a beneficial strategy for many pass through entities because a portion of income will not incur employment taxes.  In order to receive Subchapter S treatment, Form 2553 needs to be filed in a timely manner.

Social Security tax is assessed against all wages salary, tips and Schedule C income at a rate of 12.4%.  It is only assessed on income up to the contribution base, $137,700 in 2020.  Employers and employees each pay half of the tax.

Medicare Hospital Insurance Tax is assessed against all wages, salary, tips and Schedule C income at a rate of 2.9% with no cap.  Employers and employees each pay half of the tax.  There is an additional .9% Medicare Tax on income above certain limits.

The S election allows a business owner to save on employment taxes because earnings can be segregated between wages and distributions.  Wages are subject to employment taxes, whereas distributions are not.

How earnings are allocated to each category is contentious and unclear.  There are no specific guidelines for reasonable compensation.

Our team of professionals at KRD can help you determine appropriate compensation levels for Social Security taxes and retirement plan contribution levels. Contact us today to learn more. 


Newsletter signup

Receive our informative Newsletters with valuable tax, financial and business
operations information.



Read the latest news
from KRD and find out more.

Extended Consolidated Appropriations Act Benefits for Individual Taxpayers
IRS News: CP59 Notices
New Podcast: Preparing a Business for Sale

Request a callback

Would you like to speak to one of our financial advisors over the phone? Just submit your details and we’ll be in touch shortly. You can also email us if you prefer.

    I would like to discuss:


    1051 Perimeter Drive, 9th Floor
    Schaumburg, IL 60173

    Office: 847-240-1040
    Fax: 847-240-1055


    35 E. Wacker Dr., Suite 690
    Chicago, IL 60601

    Office: 312-201-6450
    Fax: 312-201-1286