By: Amanda Wilson
When deciding how to form their new business, small business owners are often encouraged to organize as an S corporation because of self-employment tax savings. This recommendation is because the IRS does not recognize that a partner in a partnership can also be an employee. As a result, the IRS takes the position that all of the partner’s income from the partnership should be subject to self-employment taxes, instead of just the amount that reflects a reasonable salary. In contrast, an owner of an S corporation can clearly be treated as both an owner and an employee, resulting in self-employment tax savings.