“Reduce Your Employment Taxes with an S Corporation”

– For 2023, the self-employment (SE) tax rate is 15.3% on the first $160,200 of net SE income, including 12.4% for Social Security tax and 2.9% for Medicare tax.
– The S Corp Advantage: For wages paid in 2023 to an S corporation employee, the FICA tax wage withholding rate is 7.65% on the first $160,200 of wages, and drops to 1.45% above that amount for the Medicare tax component.
– An S corporation employer makes matching payments except for the 0.9% Additional Medicare tax, which only falls on the employee, resulting in combined employee and employer FICA tax rates equal to the corresponding SE tax rates. 1. Shareholder-employees of an S corporation can receive federal employment-tax-free distributions of remaining taxable income.
2. S corporations can pay modest salaries to shareholder-employees and distribute most corporate cash flow as federal-employment-tax-free shareholder distributions.
3. Running a business as an S corporation with modest salaries may reduce the capacity to make deductible contributions to retirement accounts, such as a SEP, but may not affect contributions to a 401(k) plan.
4. Converting an unincorporated business to an S corporation has legal and tax implications that should be carefully considered before making the switch. – Taxpayers can take advantage of new deductions and credits to reduce their tax liability.
– Changes in tax laws may impact investment strategies and retirement planning.
– Taxpayers should stay informed about potential tax reforms and how they could affect their financial situation.

Use an S Corporation to Mitigate Federal Employment Tax Bills