Gary Bode, CPA: an S Corporation can avoid the 2013 additional Medicare Tax. For a free phone consult, call (910) 399-2705.
Any S Corporation CPA will tell you distributions circumvent employment taxes all together. S Corporation distributions are the profit taken after paying the shareholders “reasonable compensation” (formal wages subject to employee and employer payroll taxes), as calculated on the annual 1120-S. I’ve been watching Congress try to close this loophole for decades. But at the moment it’s still there. Why? Surprise, many Congressional folks run their own businesses as S Corporations. Newt Gingrich and John Edwards, for example. So, S Corporations distributions aren’t covered under the “earnings” part of the new Medicare tax described below.
A 0.9% additional Medicare tax looms on the 2013 horizon. Currently Medicare tax is 2.9% on all wages, half from your employer, and half from your paycheck. In 2013, couples earning more than $250,000 per year ($200,000 for an individual) will pay an additional 0.9% on the amount of wages over $250K/$200K. For example a single person making $250K would incur an additional $450 {250,000-200,000) x .0.9%} tax that year.
“Remember your LLC can elect to be taxed as an S-Corporation.”
- Gary Bode, S Corporation CPA
So, let’s say a husband and wife S Corporation pay themselves $150,000 and distribute $150,000 to themselves in a tax year. All the $150,000 of distributions escapes the Social Security and Medicare tax. An S Corporation CPA would try to structure one spouse’s salary above the annual Social Security threshold to save the (expected) 12.4% of Social Security Tax on that payroll component.
I’m an S Corporation CPA with a virtual/remote office to serve folks beyond my Wilmington NC site. I operate my CPA firm as an S Corporation, so you know I keep up with current developments. There are dozens of S Corporation postings on this website, including the “reasonable compensation” issue mentioned above. Just click “S Corporations” from the drop down category list in the right side bar or 1120-S from the Forms drop down box. For a free phone consult, call (910) 399-2705.
