it is in C corporations, because the S corporation generally pays no taxes at corporate rates. However, the Internal Revenue Service may challenge salaries which are used as a device to shift income to shareholders in lower income tax brackets. In addition, the cost of fringe benefits paid for employee shareholders who own more than two percent of the company’s stock must be included in the income of the shareholder. Note: Special rules apply to tax treatment of property, such as stock, received for services. Business owners contemplating such transfers should consult with their tax advisor prior to the transfer. Employment Taxes and Workers’ Compensation Insurance Employment taxes include income tax withholding, Social Security and Medicare taxes and federal and state unemployment insurance taxes. Although workers’ compensation insurance technically is not a tax, coverage is required for most employees. Employment taxes and workers’ compensation insurance are deductible business expenses in determining net income. Note: The following information on employment taxes and workers’ compensation insurance applies only to businesses that have employees. Sole proprietors and partners that provide services to the business are not considered employees for purposes of paying unemployment taxes or obtaining workers’ compensation insurance coverage for themselves. They may, however, be liable for Social Security and Medicare self-employment tax. (See the discussion of the self- employment tax below.) Shareholders in a C corporation or an S corporation who perform services for the corporation generally will be considered employees of the corporation and therefore will be subject to employment taxes. In most situations, workers’ compensation coverage for these shareholders also will be required. Self-Employment Tax. The self-employment tax (SE tax) is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure SE tax yourself using Schedule SE (Form 1040). Social Security and Medicare taxes of most wage earners are figured by their employers, also, you can deduct half of your SE tax in figuring out your adjusted gross income. Wage earners cannot deduct Social Security and Medicare Taxes. SE tax rate. The self-employment tax rate is 15.3 percent. The rate consists of two parts: 12.4 percent for Social Security and 2.9 percent for Medicare. An additional 0.9 percent is imposed on earnings from self-employment above a threshold amount of $200,000 for single and head of household filers; $250,000 for joint filers; $125,000 for a married person filing separately. Maximum earning subject to SE tax . For 2024 only the first $168,600 of combined wages, tips and net earnings are subject to any combination of the 12.4 percent Social Security tax. All combined income is subject to the 2.9 percent Medicare part of the SE tax or Social Security tax. SE tax deduction. Half of the SE tax (excluding the additional 0.9 percent described above) can be deducted in figuring the adjusted gross income. The deduction only affects your income tax. It does not affect your net earnings from self-employment or your SE tax.
26
Made with FlippingBook - Online Brochure Maker