Part 2 QBI, Credits, NOLs and Accounting Methods question: reduce self-employment and payroll taxes legitimately

Part 2QBI, Credits, NOLs and Accounting Methods

A sole proprietor nets $150,000 a year and wants to reduce self-employment and payroll taxes legitimately. Which structure can do that?

A An S corporation paying her a reasonable salary
B A partnership with her spouse as a 1% partner
C An S corporation paying her distributions but no salary
D A single-member LLC with no entity election

Show the answer and explanation

Answer: A. An S corporation paying her a reasonable salary

An S corporation shareholder-employee pays FICA only on reasonable wages; remaining profit passes through without self-employment or FICA tax. A single-member LLC without an election is still a sole proprietorship. Paying no salary invites the IRS to recharacterize distributions as wages, and a token partner does not change a general partner's self-employment tax on her share. Source: IRC 1402(a), 3121(a), 1366; Rev. Rul. 74-44; Form 2553 instructions. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Assuming forming an LLC or skipping salary changes self-employment tax.

Practice more Part 2 QBI, Credits, NOLs and Accounting Methods questions

Exam-style questions with worked answers, then full timed mocks. Free to start.

Start practicing →

Study note: QBI, Credits, NOLs and Accounting Methods Part 2practice questions & mock exams

Related Part 2 practice questions

An S corporation with no C corporation history pays its sole shareholder's personal credit card bills from the business account, with no plan to repay. How are the payments best treated?An accrual-method C corporation accrued a $50,000 bonus to its 60% shareholder (a cash-method individual) at the end of 2025 and paid it on February 10, 2026. When can the corporation deduct it?A calendar-year corporation formed in 2024 wants S status starting January 1, 2025. March 15, 2025 fell on a Saturday. By what date must it have filed Form 2553 for the election to be timely?

Build a daily practice habit — a few exam-style questions a day, with worked answers. Free to start.

Start practicing →

Original study material mapped to the public IRS SEE content outlines; not a real exam question.Not affiliated with or endorsed by the IRS or PSI. Verify figures and rules against current guidance before relying on them.