Do S corporations need to pay employment tax?

It is a common misconception that S corporation owners do not have to pay any employment taxes. This is because S corporations distribute earnings as a flow-through entity that are taxed in the current year and are not subject to self-employment tax. In fact, the IRS has ruled that the managing owner of an S corporation must pay themselves a salary that represents reasonable compensation for services rendered. The business must withhold payroll taxes just like any other paycheck received from an employer. It is only the remaining profits after salary expense that can be passed through as a distribution not subject to payroll taxes.

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