Social Security Tax Limit

[freshy70]

When implementing the S corp choice of entity strategy, I have a client who is the only shareholder employee. Their W-2 income from employment exceeds the annual maximum. The strategy does not recognize this and assumes they will pay social security tax on their wages from the S corp. In fact they would only be subject to medicare tax since they would have already met the threshold for social security tax. There is no way to suppress the calculation of social security tax on the s corp wages so the total tax savings are underestimated.

[qbteachmt]

"There is no way to suppress the calculation of social security tax on the s corp wages so the total tax savings are underestimated."

Is this what you mean: your scenario includes multiple employers (the existing and the proposed S Corp)?

"Their W-2 income from employment exceeds the annual maximum."

Every/each employer will withhold up to the SS wage limit. You treat any overage from having multiple employers as a type of prepayment (estimate and withholding) credit.

[freshy70]

Ok so rather than suppress withholding, I should just calculate the amount of overpaid SS tax and treat that as a credit on the tax side?

[TaxGuyBill]

If the SS wages are maxed out on the 'other' employer, then (a) the S-corporation pays the employer side of FICA and withholds the employee side of FICA, and (b) when the taxpayer files their tax return, the employee side of FICA is refunded.  The employer side is NOT refunded.

As for why the "Intuit Tax Advisor" program doesn't include that, it is because that is only one of many faults of the program and the 'ideas' it give you.  From what I've seen, that program is severely lacking and mostly deals with very basic things or gives half-truths/incomplete information.

[freshy70]

That's a great insight about the employer side of FICA not being refunded @TaxGuyBill and I appreciate your thoughts on the software overall. I get the same impression.

[qbteachmt]

Yes, i should have included this would be for an individual, when doing some tax planning: "I should just calculate the amount of overpaid SS tax and treat that as a credit on the tax side?" The same as what is done for Medicare overwithholding and S Corp shareholder self-employment health.

"that program is severely lacking and mostly deals with very basic things or gives half-truths/incomplete information."

I've taken a look through it and it is missing a lot of the nuance, consideration for the circular references, the "unusual scenario" such as one person might have two employers (a doctor gets paid through their practice and through a hospital), etc.

Remember "plan" is a 4-letter word.

I was just listening to a call-in show where the couple is expecting quintuplets. No one starts out planning for quintuplets, I imagine.

[IntuitJim]

Thank you for the feedback. S corp choice of entity strategy changes the entity from a schedule C to an S Corp K-1 and allows you, the advisor, to setup a reasonable W2 wage. The W2 is subject to FICA, even if they paid the full FICA on other W2's. The employee half is refunded on the 1040 when filed; the employer half is not refunded.  Declining this suggestion, and we believe the strategy supports how advisors plan to use it, but feel free to contact us if you disagree. 

[TaxGuyBill]

@IntuitJim  Does it allow you to enter wages from a second job?  If it doesn't, it isn't correctly reflecting the amount of FICA that is being refunded on the 1040.

Does the Schedule C to S-corporation show the details about how it affect Social Security benefits?  In my opinion any tax preparer (or software program) that suggests changing from a Schedule C to a S-corporation and doesn't discuss that is setting themselves up for a lawsuit when the unsuspecting taxpayer realized his Social Security (retirement, disability, spousal benefits, etc.) are reduced.

[IntuitJim]

Enter or adjust wages in the Pre-Strategy Baseline. The Review Plan projection will include any employee FICA refund for the projected year. 

Each strategy is discreet; combining multiple strategies can create a comprehensive plan. As the advisor, you know your clients best and should recommend what helps them realize their goals, including estimating Social Security benefits. Thanks for using Intuit Tax Advisor. 

Here are some additional resources: 

https://proconnect.intuit.com/taxprocenter/tax-law-and-news/too-much-or-too-little-determining-reaso...