stevie0040
12-28-2011, 02:15 PM
I am considering going from Single Member LLC to S-Corp for tax purposes while still keeping the SM-LLC status (form 2553). I've seen various SE tax savings examples online but the problem is they all assume that around $50K (FICA taxable) is a "reasonable" salary to the owner and the rest being profit (FICA nontaxable). So I've seen where if the income is $100K and $50K is salary, there is an S-Corp tax savings of roughly $7.5K (~ $50K X 15.3% FICA). Again, that is for 100K in net income and I'm assuming that our 2% FICA tax break won't last past next year.
However, what if I'm not comfortable stating $50K is a reasonable salary especially if the business income is say around $150? Say if I make the salary $100K and $50K is profit. My calc shows:
LLC FICA Calculation (from Form SE of 1040)
===============
2010 Business Income: 150,000
SS Tax Rate (up to $106.8K): 12.40%
SS Tax (up to $106.8K): 13,243
Medicare (2.9% of 92.35% of all $150K): 4,017
Total FICA Tax: 17,260
S-Corp FICA Calculation
==================
Salary: 100,000
Business Profit: 50,000
Tax Rate (up to $106.8K): 15.30%
Tax for $100K: 15,300
FICA on Profit: 0
Total FICA Tax: 15,300
So the tax savings in S-Corp in this scenario is $1,960. Still a savings but is it worth the additional reporting, paperwork, accounting/legal fees? For $50K salary, the savings would be $9,610. But is $50K reasonable when the business income is $150K, or $250K for that matter? If you play around with the numbers enough you realize that if you put your salary near the FICA max base ($106,800) the tax savings would only be the Medicare portion (2.9% x 92.35% = 2.7%) of the biz income. Is my conclusion correct? I realize that some may think that it’s foolish to put the salary near the FICA max but you just never know what the IRS would do. Thanks for looking.
However, what if I'm not comfortable stating $50K is a reasonable salary especially if the business income is say around $150? Say if I make the salary $100K and $50K is profit. My calc shows:
LLC FICA Calculation (from Form SE of 1040)
===============
2010 Business Income: 150,000
SS Tax Rate (up to $106.8K): 12.40%
SS Tax (up to $106.8K): 13,243
Medicare (2.9% of 92.35% of all $150K): 4,017
Total FICA Tax: 17,260
S-Corp FICA Calculation
==================
Salary: 100,000
Business Profit: 50,000
Tax Rate (up to $106.8K): 15.30%
Tax for $100K: 15,300
FICA on Profit: 0
Total FICA Tax: 15,300
So the tax savings in S-Corp in this scenario is $1,960. Still a savings but is it worth the additional reporting, paperwork, accounting/legal fees? For $50K salary, the savings would be $9,610. But is $50K reasonable when the business income is $150K, or $250K for that matter? If you play around with the numbers enough you realize that if you put your salary near the FICA max base ($106,800) the tax savings would only be the Medicare portion (2.9% x 92.35% = 2.7%) of the biz income. Is my conclusion correct? I realize that some may think that it’s foolish to put the salary near the FICA max but you just never know what the IRS would do. Thanks for looking.