Multiple-Entity Planning to Reduce Self-Employment Taxes: Recent Cases Demonstrate the Pitfalls and How to Avoid Them

7 Pages Posted: 1 Jun 2011 Last revised: 11 Jun 2011

See all articles by Timothy M. Todd

Timothy M. Todd

Liberty University School of Law

Date Written: April 1, 2011

Abstract

Tax practitioners use S corporations to mitigate self-employment taxes by classifying only a portion of entity distribution as wages and classifying the rest as dividends. This article analyzes recent cases where courts have invalidated attempts to lessen the burden of employment taxes by multiple-entity planning with the use of pass-through entities. This article focuses on two common practitioner flaws -- (1) deficiencies in salary setting procedures, and (2) deficiencies in multiple-entity planning. The article demonstrates the importance of setting a reasonable salary by documented procedures in S corporation taxation. The article also demonstrates how multiple-entity planning can be more effective by properly documenting and respecting the individual identities of the entities.

Keywords: tax, law, S corporation, pass through, subchapter S, accounting, tax planning, income tax, C corporation, limited liability company, LLC

Suggested Citation

Todd, Timothy M., Multiple-Entity Planning to Reduce Self-Employment Taxes: Recent Cases Demonstrate the Pitfalls and How to Avoid Them (April 1, 2011). Journal of Tax Practice and Procedure, Vol. 13, No. 2, p. 31, 2011, Available at SSRN: https://ssrn.com/abstract=1856583

Timothy M. Todd (Contact Author)

Liberty University School of Law ( email )

1971 University Boulevard
Lynchburg, VA 24515
United States

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