Mutations in the Neurofibromatosis type 2 tumor suppressor gene that encodes Schwannomin causes formation of benign schwannomas. Schwannoma cells lose their characteristic bipolar shape and become rounded with excessive ruffling membranes. Schwannomin is phosphorylated at serine 518 (S518) by p21 activated kinase (Pak). Unphosphorylated schwannomin is associated with growth inhibition but little is known about the function of the phosphorylated form, or the molecular events leading to its phosphorylation. Here, we report in SCs that schwannomin S518 phosphorylation requires binding to paxillin and targeting to the plasma membrane. Phospho-S518-schwannomin is enriched in the peripheral-most aspects of membrane specializations where paxillin, activated Pak, Cdc42 but not Rac are highly expressed. Schwannomin and Pak phosphorylation levels are not reduced in response to lowering Rac-GTP levels with NSC23766. Expression of schwannomin S518A/D-GFP variants each distinctively altered Schwann cell shape and polarity. These results are consistent with tight spatial regulation of S518 phosphorylation at the plasma membrane in a paxillin and Cdc42-Pak dependent manner that leads to local reorganization of the SC cytoskeleton.