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By that logic, why shouldn't a larger corporation have to pay 15% of its entire gross income as payroll tax? Why shouldn't someone who is a W2 employee earning

By that logic, why shouldn't a larger corporation have to pay 15% of its entire gross income as payroll tax? Why shouldn't someone who is a W2 employee earning $500K per year?

anigbrowl 16y ago
Because you only pay payroll tax on payroll, not on expenses or capital purchases like equipment. A w-2 employee (and his or her employer) pays into social security up to $106,800 per annum. Same if you're self-employed; in that case one pays both the employee and employer contributions, but the latter are deductible for calculating taxable income payable to the IRS. Here's what I don't understand about the people who are complaining. If you're self-employed, like me, you have unlimited liability for debts, torts and so on incurred as a result of work. Similarly, if I form a partnership with my buddy, either or both of us who are general partners also have unlimited liability. As an individual or a partner, I can also hire people, make business purchases and deduct those expenses for tax purposes. But if my employee or my business vehicle or whatever is the cause of liability, as a sole trader or general partner all that liability comes back to me (tax on partnerships is a little different again). Now, if instead I or myself and my friend set up an S corporation, I/we enjoy the benefits of limited liability up to (or more realistically, 'down to') the value of the shares held which are usually nominally priced at $1 or suchlike. So if I have an irresponsible employee who is negligent or runs up debts in the company's name, my personal/family assets are protected from business-related liability claims. This protection is nothing to sneeze at, and indeed, I'm looking at reorganizing for that exact reason. So why is it, exactly, that those who enjoy the considerable benefits of limited liability for their business operations should also be able to exempt part of their annual business gain from social security obligations, whereas a self-employed person, with unlimited financial liability, can not?
- bd_at_rivenhill 16y ago
  We are witnessing evolution in action here. Sole proprietorships and partnerships have become uncompetitive dinosaurs due to the explosion of litigation, and the system is in the process of reconfiguring itself to provide liability protection at a similar level of taxation. Given the risk of being involved in legal action, I don't understand why anyone would want to organize using an unprotected structure; fill out the paperwork and get yourself covered.
- tptacek 16y ago
  I don't understand why you aren't already organized as an LLC. Apart from some minor paperwork and nominal fees, there's no downside to it over a sole proprietorship. 'bd-at_rivenhill is right about this.
  - anigbrowl 16y ago
    No special reason - just that freelancing and my financial situation has been simple enough that the 'ez' filing has generally been sufficient, and the potential for liability has been minimal.
    - grandalf 16y ago
      I don't disagree with your logic, but I think you've simply chosen a non-optimal business arrangement. There is really no reason not to form an S-Corp or an LLC. In most cases, S-Corps are a better idea. Changing the tax code to prevent the taxing of distributions as capital gains simply amounts to raising taxes on small businesses. One could argue that there is no feasible legitimate reason for an s-corp smaller than 3 employees, but one could equally argue that there is no reason to cap the payroll taxable income or that there is no reason to collect payroll taxes from young people who will surely never benefit from Social Security 50+ years from now (the program will likely be pure welfare by then which removes the justification for the regressive payroll tax to fund it).
      - tptacek 16y ago
        You mean, apart from the fact that (a) the money you're "saving" on taxes can be taken from you with gigantic penalties by the IRS at any moment, because the tax courts apparently unanimously consider any compensation for services related to your employment a "wage" which is subject to FICA and FUTA, and (b) taxing all small businesses consistently lowers the long-term burden paid by the world's LLC's, sole proprietorships, LLP's, and C-Corps, all of whom are currently making up the shortfall of the people playing games with their S-Corporations. That's what you meant, right? =)
        16y ago

By that logic, why shouldn't a larger corporation have to pay 15% of its entire gross income as payroll tax? Why shouldn't someone who is a W2 employee earning $500K per year?

anigbrowl 16y ago

Because you only pay payroll tax on payroll, not on expenses or capital purchases like equipment. A w-2 employee (and his or her employer) pays into social security up to $106,800 per annum. Same if you're self-employed; in that case one pays both the employee and employer contributions, but the latter are deductible for calculating taxable income payable to the IRS. Here's what I don't understand about the people who are complaining. If you're self-employed, like me, you have unlimited liability for debts, torts and so on incurred as a result of work. Similarly, if I form a partnership with my buddy, either or both of us who are general partners also have unlimited liability. As an individual or a partner, I can also hire people, make business purchases and deduct those expenses for tax purposes. But if my employee or my business vehicle or whatever is the cause of liability, as a sole trader or general partner all that liability comes back to me (tax on partnerships is a little different again). Now, if instead I or myself and my friend set up an S corporation, I/we enjoy the benefits of limited liability up to (or more realistically, 'down to') the value of the shares held which are usually nominally priced at $1 or suchlike. So if I have an irresponsible employee who is negligent or runs up debts in the company's name, my personal/family assets are protected from business-related liability claims. This protection is nothing to sneeze at, and indeed, I'm looking at reorganizing for that exact reason. So why is it, exactly, that those who enjoy the considerable benefits of limited liability for their business operations should also be able to exempt part of their annual business gain from social security obligations, whereas a self-employed person, with unlimited financial liability, can not?

bd_at_rivenhill 16y ago
We are witnessing evolution in action here. Sole proprietorships and partnerships have become uncompetitive dinosaurs due to the explosion of litigation, and the system is in the process of reconfiguring itself to provide liability protection at a similar level of taxation. Given the risk of being involved in legal action, I don't understand why anyone would want to organize using an unprotected structure; fill out the paperwork and get yourself covered.
tptacek 16y ago
I don't understand why you aren't already organized as an LLC. Apart from some minor paperwork and nominal fees, there's no downside to it over a sole proprietorship. 'bd-at_rivenhill is right about this.
- anigbrowl 16y ago
  No special reason - just that freelancing and my financial situation has been simple enough that the 'ez' filing has generally been sufficient, and the potential for liability has been minimal.
  - grandalf 16y ago
    I don't disagree with your logic, but I think you've simply chosen a non-optimal business arrangement. There is really no reason not to form an S-Corp or an LLC. In most cases, S-Corps are a better idea. Changing the tax code to prevent the taxing of distributions as capital gains simply amounts to raising taxes on small businesses. One could argue that there is no feasible legitimate reason for an s-corp smaller than 3 employees, but one could equally argue that there is no reason to cap the payroll taxable income or that there is no reason to collect payroll taxes from young people who will surely never benefit from Social Security 50+ years from now (the program will likely be pure welfare by then which removes the justification for the regressive payroll tax to fund it).
    - tptacek 16y ago
      You mean, apart from the fact that (a) the money you're "saving" on taxes can be taken from you with gigantic penalties by the IRS at any moment, because the tax courts apparently unanimously consider any compensation for services related to your employment a "wage" which is subject to FICA and FUTA, and (b) taxing all small businesses consistently lowers the long-term burden paid by the world's LLC's, sole proprietorships, LLP's, and C-Corps, all of whom are currently making up the shortfall of the people playing games with their S-Corporations. That's what you meant, right? =)
      - 16y ago