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Hey Self-Employed Client…

December 23, 2010

Say your my self-employed client that has a 2011 Schedule C income of $200,000. The SE tax bill will be a whopping $18,600 (after multiplying $200,000 by .9235 on Schedule SE). Holy Smokes! That’s a lot of cash down the chute! As soon as inflation starts up again, the SE tax hit will start growing. That’s bad enough, but it’s even worse when you consider that Social Security and Medicare benefits may eventually become “means tested” and therefore curtailed for the very same higher-income folks who are now paying the heaviest amounts of SE tax into the system. If means testing comes to pass, it would be done in the name of “deficit reduction.”  An alternative deficit-reduction proposal would remove the Social Security tax ceiling. If that comes to pass, the 15.3% SE tax would hit SE income up to infinity. Either way, yikes!

With the above heartburn-generating considerations in mind, here’s a strategy for you that have reached the SE tax tipping point.

Set up a S Corporation to Reduce Federal Employment Taxes:  For compensation paid to an S Corporation employee in 2011, including an employee who happens to be a shareholder, the FICA tax rate is 7.65% on the first $106,800; 6.2% for Social Security tax and 1.45% for Medicare tax. Above the $106,800, the FICA tax rate drops to 1.45% becaasue the Social Security tax component cuts out. But, the 1.45% Medicare tax hits compensation up to infinity.

The bottom line is there is a window open for the federal-employment-tax-reduction strategy of setting up an S Corporation for what is now an unincorporated small business and then paying modest (but reasonable) salaries to the S Corporation’s shareholder-employees. Right now it appears the window could be open for a longer time, let’s keep our fingers crossed. At Gunwel (www.gunwel.com) this is the strategic planning that we do best. Aside from forming Corporations and LLCs we can help you run them. Give us a call at 212-979-6830 or stop by for a visit. See you soon!

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