How to classify myself under an llc so that at the end of the year I dont pay FICA on my divdends?

How do I to classify myself under an llc so that at the end of the year I dont pay FICA on my dividends? I had heard there is a way to accomplish this!

Answer

There are several ways of doing this (but still see a tax advisor anyway).

1. One method is to apply for taxation as an S corporation. When you receive a dividend from an S corporation, you do not pay FICA taxes on the dividends. The downside? The IRS requires that you be placed on the S corporation's payroll, and receive a "reasonable" salary. And, of course, that reasonable salary is subject to FICA.

2. Self-employment tax is never owed on interest, dividends, capital gains, rental income, royalties, S-corporation profits, limited partnership income, IRA distributions, pension distributions, Social Security, or any excluded income.

3. There are advisors who say that a passive investor in an LLC (a passive member of the LLC) might be considered a "limited partner" (see above), and therefore exempt from SE tax. The IRS has not issued any regulations on this, so there is some risk if you are audited. Also, to be a "limited partner" in your LLC, you can't have managerial control or actively participate in the LLC. You would need to have a manager operating your LLC.

Remember too that you get a deduction of one-half of your share of FICA taxes paid, so it's really no different from being an employee when everything shakes out. In addition, your employer probably sets your salary level taking into consideration the employer's share of FICA).