Marcia is a shareholder in an S corporation and also works for the corporation. This year, her share of ordinary income was $250,000 and her compensation was $100,000. Which of the following accurately describes her tax consequences from these earnings?
A) Both the ordinary income and the compensation are subject to income tax and self-employment tax.
B) Both the ordinary income and the compensation are subject to income tax and the compensation is subject to payroll tax.
C) Both the ordinary income and the compensation are subject to income tax and the compensation is subject to self-employment tax.
D) The ordinary income is subject to income and self-employment tax; the compensation is subject to income and payroll tax.

Question

Quizplus · Accepted Answer

S corporation distributions (ordinary income) are subject to income tax but not self-employment tax, while compensation for services (salary) is subject to both income tax and payroll taxes (Social Security and Medicare), not self-employment tax.

Marcia Is a Shareholder in an S Corporation and Also