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> This mostly puts you in the 25% tax bracket. We'll assume that there's also 5% of state income tax. For FICA, since you're both the employee and the employer,
by nodamage 10y ago
> This mostly puts you in the 25% tax bracket. We'll assume that there's also 5% of state income tax. For FICA, since you're both the employee and the employer, you pay 15.3%. All together, that means you're losing about 45% to tax off the bat.
Because tax brackets are progressive, it really does not make any sense to add the percentages up like that. No one making $100k/year is paying $45k/year in taxes.
> Your first $118,500 are brutal because you're paying an extra 15.3%, but after that FICA goes to 0%.
Only the Social Security tax (12.4%) tops out at $118,500, the Medicare tax (2.9%) does not have a cap, so you're still paying 2.9%, not 0%.
> However, money above that amount can be distributed to the shareholders as dividends. These are taxed at 15%.
This is grossly incorrect. S-corp profits are taxed as ordinary income (regardless of whether they are distributed to the shareholder or not).
> For example, if you can convince the IRS that the prevailing wage for your position is $120k, and you made $300k, then the first $120k gets taxed at 45% or so (see above) and the last $180k gets paid out in dividends and taxed at 15%.
No, the last $180k is taxed at ordinary income rates (which would be 33% given the example numbers). Do you actually operate an S-corp?
- omarchowdhury 10y agoWas going to post this. Only qualified dividends are taxed at the lower capital gains rate, normal dividends/distributions of profits are taxed at ordinary rate...
- kxyvr 10y agoJust checked. I think both of you are right on the distributions. My mistake. Let me see if I can push out better numbers. From here: http://taxfoundation.org/article/2017-tax-brackets http://taxfoundation.org/article/2017-tax-brackets https://www.tax-brackets.org/newmexicotaxtable https://www.tax-brackets.org/newmexicotaxtable $100k income generates $20981.75 federal income tax. FICA is paid on the full amount, so $15300. In my state, the top income tax rate is 4.9%, but with graduation, $4620.50. All together, that's $40902.25, or about 41%. That's not that far off the 45% estimate from above, but it is lower. I still contend that taxes on small businesses are still absurdly high.
- nodamage 10y agoIf you're going to run numbers you might as well use a calculator that at least accounts for the standard deduction, personal exemption, and deducts 1/2 of the SE tax: Income: $100,000 Self-employment tax on $100,000: $14,130 Taxable income: $100,000 - $6,300 (standard deduction) - $4,050 (personal exemption) - $7,065 (1/2 SE tax) = $82,585 Federal income tax on $82,585 = $16,418 Total federal income tax and self-employment tax: $30,548 That's about 30%. Add in $4-5k for state income tax and you're up to 35% effective tax rate at most. And this is assuming a single filer with no dependents and no other deductions. Add a spouse or dependents, or IRA/401k contributions, or business deductions, and it goes even lower.