If you own an unincorporated small business, you know your self-employment (SE) tax bills are high. In 2023, SE tax is imposed at a rate of 15.3% on the first $160,200 of net SE income. This includes 12.4% for Social Security tax and 2.9% for Medicare tax. Above $160,200, Medicare tax continues at a 2.9% rate on all income before increasing to 3.8% at higher income levels due to the 0.9% additional Medicare tax. In some circumstances, you may want to become an S corp. to save on employment taxes You can then pay modest, but justifiable, salaries to shareholder-employees and pay out most or all remaining corporate cash flow in federal-employment-tax-free shareholder distributions.
