A semiconductor device includes a semiconductor substrate, a gate structure formed over the semiconductor substrate, and an epitaxial structure formed partially within the semiconductor substrate. The gate structure includes a gate dielectric layer formed over the semiconductor substrate, a gate electrode formed over the gate dielectric layer, and a spacer formed on side surfaces of the gate dielectric layer and the gate electrode. A laterally extending portion of the epitaxial structure extends laterally at an area below a top surface of the semiconductor substrate in a direction toward an area below the gate structure. A lateral end of the laterally extending portion is below the spacer.