How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Megan C Your Own Question
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16544
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
23669918
Type Your Finance Question Here...
Megan C is online now
A new question is answered every 9 seconds

I have an S Corporation which I use to generate extra income. My

Resolved Question:

I have an S Corporation which I use to generate extra income.

My regular W2 income in 2012 was around 116K.

My S Corporation's net income for 2012 is around 27K on a gross of 143K.

I will pay taxes on the combined income at the personal level.

Will I be subjected to recalculation of taxes since the social security limit is $110,100, which is being met by my primary W2 job alone?

What is the least amount of salary should I be paying myself. I do hardly anything in the business.

Thanks
Submitted: 3 years ago.
Category: Finance
Expert:  Megan C replied 3 years ago.

Megan C :

Thank you for your question, and thanks for using JustAnswer.com. How are you today?

Megan C :

The good news is since you earned over the ss limit at your regular job, your S Corp wages will only be subject to Medicare tax.

Customer: replied 3 years ago.
What is the Medicare limit?
Expert:  Megan C replied 3 years ago.
Thanks for your follow up. You pay Medicare tax on 100% of your income - but it's only 2.9% combined for employer and employee so it's a pretty low tax, and it's only on your wages.

You should pay yourself roughly 60% of your net income...in your case that's $16,200. It's not a hard and fast rule, but typically you see 60/40 split in the profits of an S Corp - 60% wages, 40% other.

Do you have any further questions? If so, please reply below. Otherwise, please rate as "excellent" so that I may receive credit for assisting you today. Thanks again.
Customer: replied 3 years ago.

I see that there is no Medicare limit. Medicare gets charged at the personal level? Yes?

 

Why will they reassess taxes?

 

Will they reassess the whole net income at the S Corp level to a W2 income?

 

As I said, I hardly do anything in the business. I have a full time job.

Expert:  Megan C replied 3 years ago.
Thanks for your follow up. Medicare is charged 1.45% to the employer and 1.45% to the employee.

The IRS would reassess taxes if you did not classify a portion of your profits as wages, because typically in a business you pay self employment tax on 100% of the profit - so using an S corp, they don't want you to side-step all of those extra taxes. The guideline is that you pay yourself a "reasonable' amount -there's no guideline that gives you a specific rule about that amount. The rule of thumb used by professionals is 60/40.

Not 100% of the net income would be reassessed ... only a "reasonable" amount.

Please let me know if you have further questions. If not, please rate as "excellent" so that I may receive credit for assisting you today. Thanks again for being a valued JustAnswer.com customer.
Megan C and other Finance Specialists are ready to help you
Customer: replied 3 years ago.
So they will first assess the "reasonable" salary and then calculate 1.45% corporate Medicare tax or 2.90% for corporate+personal?

What much interest?
How much penalties?
Expert:  Megan C replied 3 years ago.
Thanks for your follow up. Yes, they would reassess reasonable salary and then charge the s corp 1.45% for the corporate payroll tax and you 1.45% personally for your portion of the tax. I'm not certain how much penalties and interest you will be charged - the IRS will calculate that when they do all their figures.

Thanks again for being a valued JustAnswer.com customer and have a great day.