Estimated Taxes

[Unregistered]

Does the $94200 social security limitation apply if a taxpayer is self employed.Client trying to decide if a partnership with spouse or a s-corp would be better.Net income will be about $456000 for 2006.

[Bees Knees]

The $94,200 social security limit is the total earned income an individual can make before the tax no longer applies. Earned income includes W-2 wages and Self-employed earnings. So for example, if the taxpayer already has a W-2 job for $100,000, then any additional Self-employed income would not be subject to the Social Security portion of the SE tax. Keep in mind the Medicare portion has no income limit.

[OldJack]

S-corp net income of $456,000 less a reasonable salary would not be subject to social security tax or self-employment tax, but would be subject to 1040 income tax. A "reasonable" salary is required for an officer/shareholder of a S-corp and would be subject to all payroll taxes including social security and Medicare tax.

At the profit level of $456,000 you may want to consider a C-corp and "balance" the income and income taxes between the shareholder and the C-corp to find the lowest tax brackets. In addition fringe benefits deductible to the C-corp and not taxable to the shareholder may be more beneficial in the C-corp.

[rosieea]

Estimated Taxes

Does the $94200 social security limitation apply if a taxpayer is self employed.Client trying to decide if a partnership with spouse or a s-corp would be better.Net income will be about $456000 for 2006.

The Social Security limitation is incorporated into the calculations on Schedule SE. Note that if a partnership is formed, general partners are subject to SE tax on their distributive share of earnings, as well as on guaranteed payments. It is possible to set up a partnership wherein partners can be both general & limited, such that the general partner share is very small in comparison to the limited partner share. Guaranteed payments are subject to SE tax, regardless of whether they are made to general or limited partners, but the distributive share of income to a limited partner is not.

Whether an S Corporation is a better option depends on the amount of shareholder salary that would be considered "reasonable." Pass-through income is not subject to employment taxes, but if salaries are not reasonable, then the IRS can recharacterize distributive income as salary & invoke payroll taxes with attendant interest & penalties.