The Temptation

If you’re a commissioned professional—such as an insurance agent or financial advisor—you’ve likely heard that running income through an S corporation can reduce self-employment tax. In the right structure, that can be true.

Problems arise when commissions are legally earned by you as an individual, but are later routed to an S corporation through management fees or direct ACH deposits.

A Common (and Risky) Setup

This issue typically shows up when:

• Licenses are held personally

• Carrier or broker contracts are in the individual’s name

• Forms 1099-NEC are issued to the individual’s SSN

Even if an S corporation exists, the income-producing relationship still belongs to the individual—not the entity.

Two Popular Workarounds That Fail

1. The 100% Management Fee
The individual reports commissions, then deducts nearly all of them as a management fee paid to their S corporation. On audit, this is often viewed as circular cash flow, not a legitimate expense.

2. Direct ACH to the S Corporation
Having commissions deposited directly into the S corporation’s bank account does not change who earned the income. Tax law follows the earner, not the bank routing.

The Core Question: Who Earned the Income?

Tax law consistently asks one question: Who earned the income under the governing contracts and licenses?

If the answer is the individual, the income remains subject to self-employment tax—regardless of how it is labeled or where it is deposited.

What Happens on Audit

When examined, the IRS often:

• Reclassifies commissions as Schedule C income

• Assesses self-employment tax

• Disallows management fee deductions

• Adjusts S corporation income and K-1s

The result is usually additional tax, interest, and penalties.

When Management Fees Can Work

Management fees may be defensible when the S corporation:

• Has real operations and staff

• Provides documented, ongoing services

• Charges reasonable, consistent fees—not a percentage of commissions

In these cases, the fee pays for services, not the right to income.

The Bottom Line

S corporations are effective tax tools only when they are legitimately in the income stream. That usually requires contracts, licensing, and payor recognition in the corporation’s name.

If income is earned personally, no amount of management fees or ACH routing can change the tax result.

Getting the structure right upfront is far less costly than fixing it later.