When an employee/shareholder receives an income allocation from an S corporation, what taxes apply to the income allocation?
A) FICA tax only.
B) Self-employment tax only.
C) FICA and self-employment tax.
D) None of these. This income will never be taxed.
E) None of these. This income will be taxed, but another type of tax will apply.

Question

Quizplus · Accepted Answer

An S corporation employee/shareholder must pay FICA tax on any salary received from an S corporation; however, any S corporation ordinary business income allocated to them is not subject to either FICA or self-employment tax. Rather, it will only be subject to the marginal ordinary income tax rate of the shareholder.

When an Employee/shareholder Receives an Income Allocation from an S