Mitigating Self-Employment Taxes: Recent Court Cases, Tax Planning for LLCs and S Corps

This CLE/CPE course will provide tax professionals guidance on available tax strategies to minimize or avoid self-employment tax. The panel will discuss the impact of reasonable compensation, payments to partners, and how management authority status affects whether an owner's distributive share of income from a pass-through entity is subject to self-employment tax. The panel will also provide an analysis of recent court cases impacting self-employment tax and limited partners.

On Jan. 16, 2026, the Fifth Circuit Court of Appeals rejected the IRS and Tax Court's definition of limited partner, including its reliance on functional analysis tests for determining the self-employment tax. Tax professionals must understand applicable tax rules and determine whether a partner's or member's distributive share of income is subject to self-employment tax in light of the recent court decision.

In Sirius Solutions L.L.L.P. v. Commissioner, No. 24-60240 (5th Cir. 2026), the court states, "This case turns on the meaning of 'limited partner' in 26 U.S.C. § 1402(a)(13)." To define "limited partner," the court referenced the dictionary, the Social Security Administration, and the IRS' definitions of the term. The court held that partners with limited liability are not subject to self-employment tax on their share of the partnership income, other than guaranteed payments described in Section 707(c) for services actually rendered by that partner.

Tax counsel and advisers must understand how the ruling impacts pass-through entities and their owners.

Listen as our panel discusses current tax law and recent cases, what income can be reported as exempt from self-employment income, and the implications for structuring and classifying business entities.