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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28275
Experience:  Taxes, Immigration, Labor Relations
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Self employed S corp business, currently 4 members. We pay

Customer Question

Self employed S corp business, currently 4 members. We pay ourselves a salary plus distribution. Each year we end up paying quite a bit of taxes and would like to find out if we raise our salaries and stop doing distributions will this help with our tax liabilities at the end of the year. How will this effect the company though because of FiCA Taxes. If you could please suggest a better way of doing this that would be great.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Generally wages are taxed higher compare to income passed on K1 to shareholders.
So - by increasing wages - there will be additional employment taxes - but total income passed to shareholders - wages plus income passed on K1 will be essentially the same - and individual income tax liability for shareholders will not be reduced.
Moreover - because wages are subject to additional employment taxes - it could be more beneficial from tax prospective to have larger portion of S-corporation income passed to shareholders on K1.

One way to reduce current tax liability is to set a retirement plan under S-corporation.
Fro instance - if SEP is established - S-corporation may contribute up to 25% of wages for each employee - and that amount will be deducted for income tax purposes and still NOT subject to employment taxes.
That way - contribution and earnings in SEP will be differed from income taxes - and will be taxed ONLY when actual distributions are taken.

Let me know if that addressed your question.