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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4007
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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QUESTION FOR CPA - RE: PAID EMPLOYEE VS SELF EMPLOYMENT TAX HELLO

Resolved Question:

QUESTION FOR CPA - RE: PAID EMPLOYEE VS SELF EMPLOYMENT TAX

HELLO -- WE HAVE A RELATIVELY NEW PCA, AND WE ARE HAVING WHAT SEEMS LIKE A COMMUNICATION ISSUE. I WILL RE-VISIT AFTER TAX SEASON, BUT IN THE MEANTIME THERE ARE SOME THINGS WE HAVE BEEN TOLD THAT JUST DONT SEEM RIGHT. HERE ARE THE DETAILS:

1. MY HUSBAND IS A CONTRACTOR - AND SOLE MEMBER LLC.
2. I WORK FOR HIM AND AM ON THE PAYROLL AT MINIMUM WAGE, AT $200.00 PER WEEK - JUST TO GET A GROUP RATE FOR OUR HEALTH INSURANCE. OBVIOUSLY I REALLY WORK MUCH MORE, AND AM WORTH MUCH MORE, BUT WE HAVE ALWAYS
JUST DRAWN CASH FROM OUR PROFIT.
3. IN 2012 WE PAID A TOTAL OF $15,000. IN ALL TAXES MEANING STATE AND FEDERAL INCOME TAXES, (BUT NOT INCLUDING PAYROLL TAXES AND SALES TAX). WE HAVE NEVER PAID EVEN CLOSE TO THAT MUCH BEFORE IN ALMOST 20 YEARS BUT IT LOOKS TO BE ACCURATE.
4. OUR CPA SUGGESTS THAT I RAISE MY SALARY TO 5600.00 PER MONTH, AND IT WILL REDUCE MY SELF EMPLOYMENT TAX, AND WE WILL PROBABLY THEN PAY LITTLE TO NO ESTIMATED/INCOME TAX IF I DO THIS. THE WITHOLDING SHOULD MAKE IT A WASH.

5. THE THING IS, I HAVE SHOWN OUR CPA THAT NOMATTER HOW MANY TIMES I FIGURE IT OUT -- IF I COMPARE APPLES AND APPLES AND I WAS ON THE PAYROLL FOR THIS AMOUNT IN 2012 -- IT ALWAYS COSTS APPROXIMATELY 450.00 MORE THAN WHAT THE INCOME TAXES COST ME -- TOTAL COST.

6. SHE KEEPS REWORKING THE TOTAL SALARY AMOUNT AND THE WAY I CLAIM (SINGLE ZERO ETC.) BUT THE RESULTS ARE THE SAME. IT STILL COSTS MORE THROUGH PAYROLL.

SHE DOESN'T UNDERSTAND HOW THAT COULD BE RIGHT -- BUT IN MY EXPERIENCE WITH OUR OTHER ACCOUNTANT OVER THE YEARS, THIS WAS ALWAYS THE CASE. TOTAL COST WAS ALWAYS LESS BY PAYING SELF EMPLOYMENT TAX ETC. , VS RAISING MY SALARY. AM I CORRECT?
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

Stephen G :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.

Stephen G :

After giving credit for the lower combined rate for self-employment tax and the income tax deduction for 50% of the self-employment tax the social security & medicare tax paid through self-employment tax is lower; the income tax however could be higher, so actually if you have figured it out within $450., it is pretty close. Did you give effect for the tax deductions for the self-employment tax against adjusted gross income, thus lowering the income tax?

Stephen G :

Questions?

Customer:

thank you ... unfortunately i am not at all that tax savvy. i only work with "total costs" when i figure out my monthly budget. i should have told you that it was 450.00 per month more if i raised my salary. so if i did that in 2012 i would have paid out 20,000. total cost in taxes, instead of 15,000.

Customer:

that is considerably more. i dont understand my cpas numbers, but nomatter what she hasnt been able to show me how it wont cost me more money by raising my payroll.

Stephen G :

Well, I don't think that could be correct.

Stephen G :

I would have to go over your figures to be able to determine where the difference is.

Stephen G :

Don't forget your husband's self-employment tax would be lower too.

Customer:

HERE IS HOW I FIGURED IT FOR 2012 IF I DID WHAT CPA SUGGESTED THEN...

Customer:

2012 PAYING ESTIMATED TAX:


 


3000.00 PER MO PAYROLL IMPOUND MYSELF AND ANOTHER EMPLOYEE


800.00


 


TOTAL COST TO HIS & HER FOR ROBIN AND PATTI PAYROLL


= 2200.


 


PLUS ALL TAXES (STATE AND FEDERAL) FOR 2012 = $14, 300 DIVIDED BY 12 MOS = 1200.00


 


2200.00


+


1200.00


--------------


3400.00 = TOTAL COST PAYROLL ROBIN AND PATTI, AND ALLTAXESSTATE AND FEDERAL 2012


------------------------------------------------------------------------------------



2012 USING PAYROLL AND PAYING NO ESTIMATED TAX


 


8400.00 PER MO PAYROLL = IMPOUND ROBIN AND PATTI


 


PATTI KEEPS 4000.00 ACCORDING TO IRIS


PATTI KEEPS 4500.00 ACCORDING TO KAREN


 


4400.00 = TOTAL COST PAYROLL ROBIN AND PATTI, AND ALL TAXES STATE AND FEDERAL PROJECTED 2013


 


SO THAT MEANS ITS EITHER 500.00 MORE PER MONTH ACCORDING TO KAREN AND 1000. PER MONTH ACCORDING TO IRIS


 


-------------------------------------------------------------------------------------------------------------------------

Customer:

SORRY THAT SENT BEFORE I EDITED IT.

Customer:

HANG ON WHILE I REVISE

Stephen G :

Hold on, you can't use estimated taxes; those are only progress payments, not the actual tax

Customer:

2012 PAYING ESTIMATED TAX:


 


3000.00 PER MO PAYROLL IMPOUND ME AND 1 OTHER EMPLOYEE


 


I KEEP 800.00 IN MY NET PAY


 


TOTAL COST TO COMPANY FOR ME AND ONE EMPLOYEE = 2200.


 


PLUS ALL TAXES (STATE AND FEDERAL) FOR 2012 = $14, 300 DIVIDED BY 12 MOS = 1200.00


 


2200.00


+


1200.00


--------------


3400.00 PER MONTH = TOTAL COST PAYROLL ME AND 1 OTHER EMPLOYEE, AND ALLTAXES STATE AND FEDERAL 2012


------------------------------------------------------------------------------------



2012 USING PAYROLL ONLY AND PAYING NO ESTIMATED STATE OR FED TAX


 


8400.00 PER MO PAYROLL IMPOUND ME AND 1 OTHER EMPLOYEE


 


CPA CALCULATES I KEEP 4500.00 IN MY NET PAY


4400.00 = TOTAL COST PAYROLL ROBIN AND PATTI, AND ALL TAXES STATE AND FEDERAL PROJECTED 2013


 


SO THAT MEANS ITS EITHER 500.00 MORE PER MONTH ACCORDING TO KAREN AND 1000. PER MONTH ACCORDING TO IRIS


 


-------------------------------------------------------------------------------------------------------------------------

Customer:

SORRY IT SENT AGAIN - BUT I'M SURE YOU CAN SEE HOW I ARRIVED AT THE AMOUNT I DID. AFTER ANOTHER RECALCUATION WE GOT IT DOWN TO 450.00 PER MONTH BUT THAT WAS STILL MUCH MORE

Customer:

I'M ONLY USING "ESTIMATED TAXES" AS A LABEL -- I ACTUALLY PAID THE STATE AND FEDS 14,300. TOTAL IN 2012

Stephen G :

If you were receiving the higher payroll your income taxes would be lower, so you can't use your actual 2012 income taxes as they are based upon the old payroll amount.

Customer:

SO IF I COMPARE APPLES AND APPLES AND DIDNT PAY INCOME TAX AND DID ALL OF MY PAYMENTS THROUGH MY PAYROLL AS CPA SUGGESTS, THEN IT WOULD HAVE BEEN 450. MORE PER MONTH THEN I ACTUALLY PAID

Stephen G :

Yes but you would have also had a lot more paid in toward your income taxes through the increased withholding;

Customer:

WHAT I DID WAS USE THE OLD PAYROLL AMOUNT PLUS THE TAXES I PAID AND CAME UP WITH ONE MONTHLY TOTAL. THEN I USED THE NEW PAYROLL AMOUNT AND ZERO TAXES TO COME UP WITH ANOTHER MONTHLY TOTAL -- AS IF I WOULD HAVE PAID NOTHING. THE 2ND MONTHLY TOTAL IS 450 MORE. I DONT SEE WHY I WOULDNT BE ABLE TO DO IT THAT WAY?

Customer:

I UNDERSTAND MY INCOME TAX WOULD HAVE BEEN LOWER AT THE HIGHER PAYROLL AMOUNT. THAT WAS EXACTLY MY POINT. I MADE THEM ZERO AND IT WAS STILL 450. PER MONTH MORE THAN I PAID.

Customer:

*

Stephen G :

I think you better sit down with your CPA and go over the figures together, so she can show you were the differences are; there are too many variables;

Stephen G :

You made what zero, the withholding?

Customer:

NO. I AM ASSUMING (AS MY CPA WAS HOPING TO ACHIEVE) THAT IF I MADE MY MONTHLY PAYROLL THAT AMOUNT THAT I WOULD PAY ZERO IN ADDITIONAL TAXES.

Customer:

THAT IS THE ONLY WAY I KNOW TO COMPARE THE TWO TOTAL COSTS

Customer:

TO SEE WHAT IT WOULD HAVE BEEN HAD I DONE IT THAT WAY IN 2012

Customer:

AND PAID ZERO IN TAXES -- OTHER THAN WHAT WENT THROUGH PAYROL

Customer:

WITHOLDING ETC.

Stephen G :

The reason you can't do it that way is that you would have to give credit for the lower taxes on the increased payroll. You can't simply ignore them when one is lower than the other.

Customer:

AND IT COMES OUT TO 450. MORE

Customer:

I DO UNDERSTAND THAT. BUT I GAVE 100 PERCENT CREDIT

Stephen G :

How could you if you used zero?

Customer:

I ASKED OUR CPA TO GIVE ME A NUMBER TO MAKE IT A WASH

Customer:

OR CLOSE TO A WASH.

Stephen G :

You would have had to use a negative amount.

Customer:

THOSE WERE THE NUMBERS SHE GAVE ME

Customer:

AND EVEN IF I CREDIT IT AT 100 PERCENT AND PAY ZERO TAX AND GET NOTHING BACK

Stephen G :

But without the actual numbers, there's no way to check any of the numbers.

Customer:

IT COMES OUT TO 450 MORE PER MONTH.

Stephen G :

zero isn't low enough

Customer:

I ONLY WENT BY ZERO BECAUSE SHE SAID:

Customer:

IF YOU MAKE YOUR SALARY THIS MUCH -- YOU WILL NOT HAVE TO PAY ANY TAXES

Customer:

AND YOU WILL GET NOTHING BACK

Customer:

AND I SAID

Customer:

I NEEDED TO KNOW MY MONTHLY COST

Customer:

WHICH WAS MY IMPOUND AMOUNT

Customer:

AT 8400.00

Customer:

AND MY MONTHLY COST IS 450. MORE THAN IT WAS IN JUST PAYING THE TAXES

Stephen G :

You need to go over the numbers with your accountant; I can't verify her figures or yours without the computations.

Stephen G :

Where is the benefit of your husband's lower self-employment tax?

Customer:

OKAY I UNDERSTAND. BUT FROM A GENERAL PERSPECTIVE. IS IT LESS EXPENSIVE TO USE PAYROLL OR SELF EMPLOYMENT TAX TO PAY OUR TAXES?

Customer:

THERE IS NO BENEFIT THAT I CAN SEE. CPA SAID I MAY AS WELL INCREASE MY SALARY AND CAN COLLECT UNEMPLOYMENT IF NEED BE DOWN THE ROAD -- OR DISABILITY.

Customer:

BUT I SAID, NOT IF IT IS GOING TO COST ME MORE THAN ITS WORTH.

Stephen G :

Nothing is that straightforward when you are talking about raising one person's payroll & lowering another's;

Customer:

I AM ONLY LOOKING FOR THE LEAST EXPENSIVE WAY TO PAY MY TAXES.

Customer:

I GUESS WHAT I AM ASKING IS WHETHER IT IS MORE COST EFFECTIVE TO USE SALARY OR JUST PAY THE SELF EMPLOYMENT TAX.

Customer:

ALL THINGS CONSIDERED.

Stephen G :

There's no way to make a generalization like that without knowing all the figures. I can tell you the difference isn't $5,000. if eveything gets factored it; as a matter of fact, the reason that the SE rate is less is an attempt to equalize it with the net payroll cost of an employee at the same income.

Customer:

OKAY THANK YOU.

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4007
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and other Tax Specialists are ready to help you

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