3 ms·

Keep in mind that S-corp owners (full disclosure: I am one) pay not just the employee's side, but also the employer's side, of FICA -- so what's 7.5-ish percent

by pdxgene 17y ago

Keep in mind that S-corp owners (full disclosure: I am one) pay not just the employee's side, but also the employer's side, of FICA -- so what's 7.5-ish percent of payroll to a typical employee is actually 15-ish percent to a small business owner. Also, if you happen to be contributing to a SEP IRA, or concerned about the size of your eventual Social Security distribution (which is based on your 40 best payroll quarters), then you as an S-corp owner also have an interest in running a higher amount as payroll rather than profit. It's a balancing act with multiple factors, as with most tax considerations. Add in month-to-month cash flow uncertainty, and "reasonable" becomes very elastic very quickly. Pure speculation, but I'd wager that the amount of tax avoided by small business owners by underpaying salaries is likely dwarfed by those avoided by the owners of bigger companies, who have the combined benefits of lobby power and armies of accountants figuring out loopholes for them. But maybe I'm just cynical and getting old.

tptacek 17y ago
Those loopholes should be closed too. I just don't see an intellectually honest argument that concludes that an $80,000 "bonus" over a $10,000 salary is somehow, through the magic of small business, less taxable than a $90,000 salary. Also: I'm wading into deep water by saying this, but the issue isn't income uncertainty at all, is it? It's not how much you make, it's how much you list as payroll-taxable income. Sure, your salary may be uncertain over the year, but if you end up at $90,000 from your company, your whole income should be liable for FICA just like a BigCo worker's.
- pdxgene 17y ago
  "if you end up at $90,000 from your company, your whole income should be liable for FICA just like a BigCo worker's" Why? By that reasoning, shouldn't profits that BigCo shareholders make (which become personal income when they realize them) subject to FICA? I'm both an owner and an employee -- why shouldn't some of my income be FICA-taxable as the output of "labor", and some be non-FICA-taxable as business profit?
  - tptacek 17y ago
    >Shrug<. The profits that private traders make are technically investment income too, but they have to pay self-employment on them. I think the reality is that most of the income we're talking about here really is just the product of labor. I'd be interested in hearing the scenario in which a small S-Corp is generating profits that are meaningfully different from their basic payroll.
    - DenisM 17y ago
      S-Corp will pay payroll taxes on "fair salary" even if none of the profits are distributed and all of it is reinvested back into the business. That's unfair too, isn't it? And it's very typical for a bootstrapped company - I keep burning through my savings and reinvest all company profits back into the business. Why should I pay payroll taxes on that? That money was never paid out to anyone and shouldn't be taxed as anything more than income tax.

by pdxgene 17y ago

tptacek 17y ago

Those loopholes should be closed too. I just don't see an intellectually honest argument that concludes that an $80,000 "bonus" over a $10,000 salary is somehow, through the magic of small business, less taxable than a $90,000 salary. Also: I'm wading into deep water by saying this, but the issue isn't income uncertainty at all, is it? It's not how much you make, it's how much you list as payroll-taxable income. Sure, your salary may be uncertain over the year, but if you end up at $90,000 from your company, your whole income should be liable for FICA just like a BigCo worker's.

pdxgene 17y ago
"if you end up at $90,000 from your company, your whole income should be liable for FICA just like a BigCo worker's" Why? By that reasoning, shouldn't profits that BigCo shareholders make (which become personal income when they realize them) subject to FICA? I'm both an owner and an employee -- why shouldn't some of my income be FICA-taxable as the output of "labor", and some be non-FICA-taxable as business profit?
- tptacek 17y ago
  >Shrug<. The profits that private traders make are technically investment income too, but they have to pay self-employment on them. I think the reality is that most of the income we're talking about here really is just the product of labor. I'd be interested in hearing the scenario in which a small S-Corp is generating profits that are meaningfully different from their basic payroll.
  - DenisM 17y ago
    S-Corp will pay payroll taxes on "fair salary" even if none of the profits are distributed and all of it is reinvested back into the business. That's unfair too, isn't it? And it's very typical for a bootstrapped company - I keep burning through my savings and reinvest all company profits back into the business. Why should I pay payroll taxes on that? That money was never paid out to anyone and shouldn't be taxed as anything more than income tax.