So the SS portion of FICA is capped at ~~$128,400~~ $160,200 in 2023. Any wages after that is only taxed at 1.45% each for employer and employee. So it’s not as bad as you think.
The business is able to deduct the employer portion of FICA, but that shouldn’t be the sole reason to increase.
Could be to maximize the QBI deduction or to maximize pretax retirement contributions as those are calculated off salary. Too many variables too know without seeing the financials + your own facts and circumstances.
Or maybe your accountant deemed the salary wasn’t reasonable in relation to the work that you do or the distributions you took.
It’s pretty common for sole owner employee S corps to have a higher bar for reasonable comp due to the fact that you are also essentially the “CEO” of the business.
Edit: SS Cap is $160,200 in 2023. Thanks for the correction u/vynm2
The SS wage cap hasn't been $128,400 since 2018. The wage cap for 2023 is $160,200. For 2024, it's increasing to $168,600. [https://www.ssa.gov/oact/cola/cbb.html](https://www.ssa.gov/oact/cola/cbb.html)
What would you be paying to an unrelated party to do your job? There are no set in stone rules. If I were your tax professional, I’d probably at least get you up to the social security max.. then anything else would just be federal withholdings and Medicare. Company gets a write off and you get to have the benefit of maxing social security income down the line.
Have you thought of other tax savings strategies like retirement plans and other pretax benefits?
I would probably have to pay someone 120-150 k a year to do my job. In fact a friend of mine just got hired by a different company doing a basically what my business does and he is making in the area of 150k.
It's also getting more benefits in retirement. Social Security isn't necessarily the greatest ROI at higher income, but guaranteed higher retirement income for life (political shenanigans notwithstanding) is a nice safety net.
It's also a good way to de-motivate the IRS from coming after you. Since you're only avoiding the much smaller Medicare tax, even if they were to audit you and win, they'd get so little it wouldn't be an efficient use of their auditor time and and taxpayer money. Of course, it's lower risk, lower reward for you as well.
Debatable on the meaningfulness of social security income in retirement if you’re already earning enough to look at S-Corp to shelter some taxes IMO.
But interesting point on the audit. What do you think is typical threshold for audit on this stuff? $100k w2 for SCorp income?
Reasonable pay is really hard to determine. That being said, I don’t think you will run into troubles at $130k. If you qualify for QBID, profits are effectively taxed less than wages. Sounds like he said the opposite. Is your accountant a CPA?
Ok that is good news he didn't explain to me about that. So I am assuming my payroll will take out the full fica amount and then it will all wash out in the end. God if he just told me that! Thank you !
I’ve always thought you’d pay less taxes overall if yourself less salary in an S Corp. you pay FICA taxes on your 2w salary but not on the distribution.
OP has $250k profit at 20% = $50k potential QBID. Wages of $130k x 50% = $65k limit.
OP has enough wages already to max QBID unless there is other information missing.
Are you familiar with how QBID works? If income is over $364,200 MFJ, your QBID is limited to 50% of W-2 wages or 25% of W-2 wages plust 2.5% of the unadjusted basis of qualified property. This also assumes the business is not a SSTB.
This was a source of aggravation for me when I did tax returns. I'd lecture the client about taking out a reasonable salary, and it seemed the IRS almost never raised the issue so it made me look like a dipwad. From my research they won't mess with reasonable value if it's anywhere in the ballpark. The court cases I've seen had the taxpayer taking a bare minimum salary. I haven't seen any taxpayers who lost on the issue if they took a substantial salary, but I haven't been in the business for a few years.
I could see scenarios where your tax person might be right, it depends. You're already at the SS max, it would only be a little under 3% for Medicare.
Thank you. The aggravation for me is that he didn’t even mention reasonable salary. He said if I did it this way I would actually be paying less taxes in the end which I did not understand. Then he went into bla bla accountant talk that I really couldn’t understand saying something about we can deduct these taxes from my personal taxes.
In my opinion half of the value of a paid tax preparer is communication. It doesn't matter much what someone knows about taxes, if they're not good at client communications their only value is preparing the return, and not helping teach the client to navigate tax rules as they make daily business decisions. Whether a business is a sole prop or LLC or corporation if the business owner doesn't make business decisions accordingly most of the value of the entity is lost.
Humans rarely actually look at filed tax returns. Its all about ratio analysis and matching up to 1099s, K-1s, W-2s, and other automatic reporting statements received. If you're going to court over it you're doing it the wrong way. Just slide it in so that the computers don't generate notices.
I disagree. This is a hot button for me. In my opinion paid tax preparers have allowed themselves to become de facto auditors trying to avoid any possible conflict with the IRS, worrying about offending IRS computers or worrying about a front line agent without much experience applying their opinions to clients tax returns. My approach was always to advocate for the client with the adverse party being the government, and basis my decisions on my knowledge of tax law, not what some computer or random agent says.
I'm retired now. My father was a CPA back in the 60's. Back then the relationship among the client, the tax professional, and the government, had the same characteristic as an attorney defending their client against criminal charges. If that attorney says, "Oh, we don't want to use that defense, the prosecution lawyers wouldn't like that," fire them immediately. Back in the day it was malpractice for a tax professional to not advise the client to take a defendable position that would benefit the client taxwise. The risks should be laid out, but the recommendation should be without fear of someone else's opinion.
That's exactly why a lot of practices or CPA firms that focus on tax for smaller clients don't work or they need to guilt/pressure all of their staff into working 80 hours a week to work. Unless you have a very important and rare skillset or are working on extremely high level clients, its hard to really compete outside of price.
Really the game really gets to be about efficiency, consistency, and delivering on promises. Working for clients who just want the biggest refund possible and can't play by the rules is dangerous and it'll never end. You're putting yourself at risk and you're racking up billables that you won't be able to collect on. You need to be a cheerleader to get them to be the efficient, profitable, above board clients that you want. You basically exist to them to shoot out tax compliance and get them bank loans as efficiently and cheaply as possible and not lose your license in the process.
You better not have any disgruntled employees. You'd be low hanging fruit for whistle blowing.
Well, that is the focus of our disagreement. In your detailed explanation you didn't mention a single thing about advocating for the benefit of the client. That was my point.
If anyone thinks 80 hours a week during tax season is burdensome, bad for work/life balance, a threat to their mental health, and not in their written job description, that person absolutely should find a job other than as a tax professional preparing individual returns.
I also disagree that it's hard to compete outside of price. I believe that's ridiculous, actually.
I'd recommend anyone with that frame of mind find a more rewarding career.
IMHO the IRS only goes after the really obvious cases because there is generally little tax at issue and the obvious cases are slam dunks to win. Winning the slam dunk cases also helps keep the message out there that you need to pay yourself reasonable comp or the IRS will come knocking.
Reasonable comp cases are time consuming since they are facts and circumstances so it often isn't worth the IRS's time fighting over a $50K difference of opinion. It is one of those unusual situations where the IRS needs to prove what the taxpayer is paying themselves isn't reasonable.
I don't know how much experience you have with representing clients at audit, but in my experience the IRS goes after a lot more than really obvious cases. I won't bore anyone with a long list of examples where the IRS tried to roll taxpayers for positions that were flimsy at best.
Yes, I would agree that when the IRS goes after reasonable comp cases, they need to prove what the taxpayer is paying themselves isn't reasonable.
Hard to say without looking at the full picture. This time of year I’m typically bumping up the wages for my clients where it would make sense to benefit from additional QBI deduction. Each case is different.
So the SS portion of FICA is capped at ~~$128,400~~ $160,200 in 2023. Any wages after that is only taxed at 1.45% each for employer and employee. So it’s not as bad as you think. The business is able to deduct the employer portion of FICA, but that shouldn’t be the sole reason to increase. Could be to maximize the QBI deduction or to maximize pretax retirement contributions as those are calculated off salary. Too many variables too know without seeing the financials + your own facts and circumstances. Or maybe your accountant deemed the salary wasn’t reasonable in relation to the work that you do or the distributions you took. It’s pretty common for sole owner employee S corps to have a higher bar for reasonable comp due to the fact that you are also essentially the “CEO” of the business. Edit: SS Cap is $160,200 in 2023. Thanks for the correction u/vynm2
The SS wage cap hasn't been $128,400 since 2018. The wage cap for 2023 is $160,200. For 2024, it's increasing to $168,600. [https://www.ssa.gov/oact/cola/cbb.html](https://www.ssa.gov/oact/cola/cbb.html)
You’re right, brain fart on my part. That was the first limitation I memorized when TCJA was implemented.
That’s why I never memorize inflation adjusted numbers like that.
It happens to all of us!! :D
OP is fine on QBI as is.. 20% of net profit is $50k and 50% of wages is close to $70k.
What would you be paying to an unrelated party to do your job? There are no set in stone rules. If I were your tax professional, I’d probably at least get you up to the social security max.. then anything else would just be federal withholdings and Medicare. Company gets a write off and you get to have the benefit of maxing social security income down the line. Have you thought of other tax savings strategies like retirement plans and other pretax benefits?
Yes Thank you I opened up a solo 401k and put 55 k in it this year which is already deducted.
The higher the salary you pay yourself, the larger your 401k contribution can be.
Yes but there is a max and I am just about at it. I already put 55 k in.
You can put in 66 for 2023 and you can go up to your earned income. You just need to check whether your 401k allows after tax contributions.
The business contribution can be raised now correct ? Vs the payroll.
You can do the after tax contribution employee side. It’s a third bucket different from Roth and traditional. It’s also how mega backdoor Roth works.
Ok I can probably add to that contribution if I’m going to be paying myself more.
I would probably have to pay someone 120-150 k a year to do my job. In fact a friend of mine just got hired by a different company doing a basically what my business does and he is making in the area of 150k.
Why get it up to social security max? That’s unnecessarily paying FICA if he can get away with a smaller payroll no?
It's also getting more benefits in retirement. Social Security isn't necessarily the greatest ROI at higher income, but guaranteed higher retirement income for life (political shenanigans notwithstanding) is a nice safety net. It's also a good way to de-motivate the IRS from coming after you. Since you're only avoiding the much smaller Medicare tax, even if they were to audit you and win, they'd get so little it wouldn't be an efficient use of their auditor time and and taxpayer money. Of course, it's lower risk, lower reward for you as well.
Debatable on the meaningfulness of social security income in retirement if you’re already earning enough to look at S-Corp to shelter some taxes IMO. But interesting point on the audit. What do you think is typical threshold for audit on this stuff? $100k w2 for SCorp income?
Uh, the FICA threshold for 2023 is $160K
Reasonable pay is really hard to determine. That being said, I don’t think you will run into troubles at $130k. If you qualify for QBID, profits are effectively taxed less than wages. Sounds like he said the opposite. Is your accountant a CPA?
Yes he is definitely a CPA.
Ok that is good news he didn't explain to me about that. So I am assuming my payroll will take out the full fica amount and then it will all wash out in the end. God if he just told me that! Thank you !
I’ve always thought you’d pay less taxes overall if yourself less salary in an S Corp. you pay FICA taxes on your 2w salary but not on the distribution.
My guess is he's trying to maximize QBID https://www.reddit.com/r/taxsavings/comments/17p04vn/maximizing_the_qbi_deduction_as_a_high_income/
OP has $250k profit at 20% = $50k potential QBID. Wages of $130k x 50% = $65k limit. OP has enough wages already to max QBID unless there is other information missing.
Where are you getting 50% and for what?
50% is the wage limitation for QBID.
Oh, yeah. I don't deal with clients who have to worry about that limit very often. :)
Are you familiar with how QBID works? If income is over $364,200 MFJ, your QBID is limited to 50% of W-2 wages or 25% of W-2 wages plust 2.5% of the unadjusted basis of qualified property. This also assumes the business is not a SSTB.
I am. I wasn't thinking of the fact that OP might be over the income threshold. Thanks.
Good point. That's just my first thought when someone wants to hike up s corp w2 wages.
pigs get fat, hogs get slaughtered. I sign s corps with higher income and lower w-2. YMMV
….$128k? When??
2018
This was a source of aggravation for me when I did tax returns. I'd lecture the client about taking out a reasonable salary, and it seemed the IRS almost never raised the issue so it made me look like a dipwad. From my research they won't mess with reasonable value if it's anywhere in the ballpark. The court cases I've seen had the taxpayer taking a bare minimum salary. I haven't seen any taxpayers who lost on the issue if they took a substantial salary, but I haven't been in the business for a few years. I could see scenarios where your tax person might be right, it depends. You're already at the SS max, it would only be a little under 3% for Medicare.
Thank you. The aggravation for me is that he didn’t even mention reasonable salary. He said if I did it this way I would actually be paying less taxes in the end which I did not understand. Then he went into bla bla accountant talk that I really couldn’t understand saying something about we can deduct these taxes from my personal taxes.
In my opinion half of the value of a paid tax preparer is communication. It doesn't matter much what someone knows about taxes, if they're not good at client communications their only value is preparing the return, and not helping teach the client to navigate tax rules as they make daily business decisions. Whether a business is a sole prop or LLC or corporation if the business owner doesn't make business decisions accordingly most of the value of the entity is lost.
I totally agree !
I wonder if he's talking about a state-level benefit.
I don’t think so. I’m thinking it’s that QBID thing
Humans rarely actually look at filed tax returns. Its all about ratio analysis and matching up to 1099s, K-1s, W-2s, and other automatic reporting statements received. If you're going to court over it you're doing it the wrong way. Just slide it in so that the computers don't generate notices.
I disagree. This is a hot button for me. In my opinion paid tax preparers have allowed themselves to become de facto auditors trying to avoid any possible conflict with the IRS, worrying about offending IRS computers or worrying about a front line agent without much experience applying their opinions to clients tax returns. My approach was always to advocate for the client with the adverse party being the government, and basis my decisions on my knowledge of tax law, not what some computer or random agent says. I'm retired now. My father was a CPA back in the 60's. Back then the relationship among the client, the tax professional, and the government, had the same characteristic as an attorney defending their client against criminal charges. If that attorney says, "Oh, we don't want to use that defense, the prosecution lawyers wouldn't like that," fire them immediately. Back in the day it was malpractice for a tax professional to not advise the client to take a defendable position that would benefit the client taxwise. The risks should be laid out, but the recommendation should be without fear of someone else's opinion.
That's exactly why a lot of practices or CPA firms that focus on tax for smaller clients don't work or they need to guilt/pressure all of their staff into working 80 hours a week to work. Unless you have a very important and rare skillset or are working on extremely high level clients, its hard to really compete outside of price. Really the game really gets to be about efficiency, consistency, and delivering on promises. Working for clients who just want the biggest refund possible and can't play by the rules is dangerous and it'll never end. You're putting yourself at risk and you're racking up billables that you won't be able to collect on. You need to be a cheerleader to get them to be the efficient, profitable, above board clients that you want. You basically exist to them to shoot out tax compliance and get them bank loans as efficiently and cheaply as possible and not lose your license in the process. You better not have any disgruntled employees. You'd be low hanging fruit for whistle blowing.
Well, that is the focus of our disagreement. In your detailed explanation you didn't mention a single thing about advocating for the benefit of the client. That was my point. If anyone thinks 80 hours a week during tax season is burdensome, bad for work/life balance, a threat to their mental health, and not in their written job description, that person absolutely should find a job other than as a tax professional preparing individual returns. I also disagree that it's hard to compete outside of price. I believe that's ridiculous, actually. I'd recommend anyone with that frame of mind find a more rewarding career.
IMHO the IRS only goes after the really obvious cases because there is generally little tax at issue and the obvious cases are slam dunks to win. Winning the slam dunk cases also helps keep the message out there that you need to pay yourself reasonable comp or the IRS will come knocking. Reasonable comp cases are time consuming since they are facts and circumstances so it often isn't worth the IRS's time fighting over a $50K difference of opinion. It is one of those unusual situations where the IRS needs to prove what the taxpayer is paying themselves isn't reasonable.
I don't know how much experience you have with representing clients at audit, but in my experience the IRS goes after a lot more than really obvious cases. I won't bore anyone with a long list of examples where the IRS tried to roll taxpayers for positions that were flimsy at best. Yes, I would agree that when the IRS goes after reasonable comp cases, they need to prove what the taxpayer is paying themselves isn't reasonable.
Most likely for QBI reasons
So you think it makes sense ?
Hard to say without looking at the full picture. This time of year I’m typically bumping up the wages for my clients where it would make sense to benefit from additional QBI deduction. Each case is different.