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)
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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
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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.
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