My accountant, who does the taxes for me as an S-Corp, takes 41% out of each paycheck to do so. Is this excessive? She said because we are in the 22% tax bracket she doesn’t recommend taking less out. Thoughts? Thanks!
In an S-Corp, the idea is to split the income into two buckets: (1) salary, and (2) distributions. The point of this is to reduce taxes because you don’t pay payroll taxes on the distributions.
However, you still need to pay income tax on the distributions. It sounds like the accountant is withholding on the salary to cover both the wage income and the distribution income. Basically, she’s saving you from needing to write quarterly estimate checks to the IRS.
That said… a ton of people screw up S-Corps, so without further detail Reddit cannot tell you if this is reasonable or not.
@Ash
Yes. My understanding is you want the lowest justifiable income for yourself and take the rest as business owner distributions.
Kiran said:
@Ash
Yes. My understanding is you want the lowest justifiable income for yourself and take the rest as business owner distributions.
Your moniker? A fantasy?
@Ash
I know several people who took minimal wages over the years and disproportionate distributions. I’m not talking millions, but a 30K salary vs a 150K non-dividend distribution. They never got called on it by the IRS.
These people are now screaming like stuck pigs when they realize their monthly Social Security is $12-$1500 vs the $32-$3500 others are drawing.
Is the federal income tax withheld 41%? I suspect your 41% figure includes Social Security, Medicare, and probably state income tax too.
It depends on what the S-Corp income is going to be.
This seems like it’s in the right ballpark if your wage is roughly equal to the net profit of the business. The ordinary income from your business is not subject to payroll taxes, but it still would be subject to your marginal income tax rate of 22%. So if you’re getting paid 50k and having 41% (20,500) withheld, it’s like having 20.5% withheld on the total of your 50k wage + 50k net profit. That’s a simple example; the actual numbers may be skewed by the fact that your tax deposits include the employer’s portion of FICA tax (an extra 7.65% compared to a regular W-2 job), and you may be including that in your 41% calculation.
If your income puts you just barely into the 22% bracket, your effective tax rate may actually be in the low teens and this may be excessive withholding. But if you’re firmly in that bracket, you would reasonably want your tax withholding rate to be 18-20% of the total taxable income you’re generating from the S-Corp, wage included.
Assume that’s total including state taxes. Remember, just FICA is over 15%.
Could be overly conservative. But you didn’t tell us what state you were in either.
Lennie said:
Assume that’s total including state taxes. Remember, just FICA is over 15%.
Could be overly conservative. But you didn’t tell us what state you were in either.
Better to have a client getting refunds or having an overpayment to carry forward than a surprise tax liability at filing.
Lennie said:
Assume that’s total including state taxes. Remember, just FICA is over 15%.
Could be overly conservative. But you didn’t tell us what state you were in either.
For payroll withholding, FICA is 7.65%. The matching would not show as a reduction of the payroll check.
Significantly more context is needed to answer this question.
Just ask for a breakdown of the 41% and its justification. It seems like they’re being overly cautious. Your tax return will tell you everything. Are you consistently getting a large return? This will tell if too much is being withheld.
Ainsley said:
@Merrill
Are you consistently getting a large return?
Refund*
As a former tax preparer, one of my biggest pet peeves. In the industry, RETURNS are filed. Any money coming back is a REFUND.
‘Why is my return smaller?’
Actually, the tax RETURN is bigger as we had to add more forms this year. The extra income on those forms caused your REFUND to be smaller.
Find a new accountant.