From an accounting firm's newsletter:
The federal self-employment (SE) tax just keeps going higher and higher. [No, apart from a cost of living adjustment in the earnings base, it hasn't changed in many years.] If you've reached the breaking point, there may be a way to tame the SE tax beast by converting your existing unincorporated small business into an S corporation. ...
So it may be time to consider an S corporation conversion. Reason: The SE tax doesn't apply to earnings from an S corporation business.
The FICA tax is only due on an S corporation shareholder-employee's salary. So when the company pays only a portion of its profits to the owner, or owners, in the form of a reasonable salary, with the remaining portion paid out in the form of cash distributions, only the salary portion is hit with Social Security and Medicare taxes (in the form of the FICA tax). The profits paid out as cash distributions are exempt from the FICA tax (and exempt from the SE tax too)....
The S Corporation is one of the biggest tax dodges in the country. Supposedly the shareholder-employee must claim a legitimate salary but the IRS rarely enforces the rule.
ReplyDeleteWhy shouldn't it be legal? What am I missing. As long as you pay yourself a reasonable salary.
ReplyDeleteWhen I worked at IRS, this was an audit target...although what is an "unreasonable salary" is a very difficult thing to prove.
ReplyDeleteAll is good, until you avoid the FICA tax and suddenly those elusive 20 quarters of coverage disappear. OOPS
ReplyDeleteExactly 7:03 PM. "What the H*** why am I not eligible for dib" or "Why is my rib benefit so small". Um, hello, you didn't pay in, we don't pay out. Too many accountants advocating this kind of thing to reduce tax liabilities without knowing the consequences.
ReplyDeleteI have seen several SSI applicants who used to be rich until disaster...usually medical but not always...hit
ReplyDeleteThey claim a "reasonable" salary which not only keeps them insured and gets them a benefit, but but they also benefit from the weighting of the benefit formula to help career low earners.
ReplyDelete