LLCs and S Corporations: Mitigating Self-Employment Tax for Flow-Through Entities

Tax advisers struggle with whether a partner's or member’s distributive share of income is subject to self-employment tax. Recently, in Soroban Capital Partners LP et al. v. Commissioner, 161 T.C. No. 12 (2023), the tax court sided with the IRS and ruled that determining whether a partner is a limited partner, and therefore subject to self-employment tax, should be made based on the level of activity of the limited partner in the partnership.

Tax advisers often reflexively recommend electing S corporation status solely to mitigate self-employment tax. Before making such an election, tax advisers and their clients need to carefully weigh the potential disadvantages of S corporation status against a realistic estimate of the potential self-employment tax savings and against alternative structures and reporting positions that would allow the LLC members or partners to avoid self-employment tax on their distributive share income.

Listen as our self-employment tax expert explains, based on current law and recent cases, what income from flow-through entities can be reported as exempt from self-employment income and the implications for structuring and classifying business entities. The panel will also highlight possible legislative changes on the horizon.

1. Overview of self-employment tax on pass-through income
2. S corporations
   1. Self-employment tax considerations
   2. Reasonable compensation
   3. Weighing S corporation status
3. LLCs and partnerships
   1. The limited partner exception: law and recent cases
   2. Planning implication
4. Possible legislative changes

The panel will cover these and other critical issues:

• When should an LLC member's flow-through income be reported as self-employment income?
• How can payments to partners be structured to mitigate self-employment tax?
• When do the disadvantages of S corporation status outweigh the potential self-employment tax savings?
• The impact of the tax court ruling in Soroban Capital Partners on taxation of limited partners' interests
• How might future legislative changes affect planning for self-employment taxes for LLCs and S corporations?

Learning Objectives

After completing this course, you will be able to:

• Recognize when a taxpayer is subject to self-employment tax
• Determine when an LLC member or S corporation shareholder's flow-through income should be reported as self-employment income
• Identify the advantages and disadvantages of S corporation status
• Verify that reasonable compensation is "reasonable" and not subject to be treated as disguised dividends
• Ascertain the various tests related to limited partners and the treatment of an LLC member as a limited partner

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).