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First, there are no morals involved in taxes. I don’t make the tax laws and I have no responsibility to pay more tax than I owe. If Congress wanted to close thi
by zrail 8y ago
First, there are no morals involved in taxes. I don’t make the tax laws and I have no responsibility to pay more tax than I owe. If Congress wanted to close this then they would. I believe it was a plank of Hillary’s campaign.
Second, there’s a very narrow window where it actually makes sense. Above $128k of salary you don’t pay Social Security tax at all, just Medicare. “Underpaying” social security reduces your future annuity, so it’s not like this is a panacea.
Third, paying yourself zero salary and taking profit sharing distributions is indeed a massive audit risk. I’ve never done that and don’t ever plan on it (see: article title).
- tptacek 8y agoRight: that narrow window is what makes it so crazy-making. Virtually everybody who employs this dodge is comparatively privileged. Most people don't get to opt a big chunk of their income out of Medicare/Social Security taxes; why should tech company operators? We're an LLC filing as S-Corp, for what it's worth. I just don't play this particular game.
- zrail 8y agoI am all for Congress removing this as a benefit of S corps and simultaneously removing or significantly lifting the Social Security wage cap. That’s a thing I would vote for. Until it happens, though, people are going to continue doing this. Congress removed a similar dodge for C corps almost 80 years ago, so it can certainly be done. S corps aren’t just used by consultants, FWIW. The structure makes a lot of sense for companies with lots of profit and more than owner employees, where the owners can justifiably claim they don’t generate all the profit from their personal services.
- tptacek 8y agoThe whole idea of "profit not generated from personal services" that are exempt from Medicare taxes is what's problematic. If you own a company and make six figures in income from it, you should be paying taxes on it as regular income. Medicare and Social Security already have a break for high-income earners --- the income limit you previously mentioned. I don't know that we really disagree about any of this; I'm just ranting. It upsets me that people think this is legitimate and exploit it, or that "Mr. Money Mustache" would promote it.
- zrail 8y agoMedicare doesn’t have the same income limit. In fact, Medicare has an additional bracket above $250k earned income. We agree that it’s not a great legal outcome. I just don’t see it as something worth getting outraged about. The number of people truly exploiting this system is very small, and the ones that are egregious get caught.
- sheeshkebab 8y agoThanks for all the comments on this - I really had no idea it would be this controversial, was just curious (and wondering whether to be more creative with corp stuff for my next project, mostly whether I grown up enough to have Inc. suffix on it, rather than LLC)