Schedule C vs W-2/Corp

[austin3515]

Am I crazy, or will a Schedule C Taxpayer pay less in Medicare Taxes than a corporation?

$200,000 of profits bonused to a W-2 owner = payroll taxes of: 10,100.54

Gross: 200,000

SS Tax: (7,347) (118,500 x 6.2%)

MC Tax: (2,753.54)*

*200,000 - 7,347 - 2,753.54 = 189,899.46

189,899.46 x .0145 = 2,753.54 (circular calc)

A Schedule C pays Medicare Taxes of 2,678.15 ($200,000 x .9235 x .0145)

Correct??  I guess the IRS's point is don't overcomplicate for such a small disparity?

 

[austin3515]

Follow up question:

Same example.  The Corporation my example does a $25,000 profit sharing contribution for the business Owner.

$200,000 - 25,000 = $175,000 of W-2 Comp (i.e., I had $200K total to spend, split $175 as W-2 wages and $25K as PS).

So you go through the same exercise above and payroll taxes are based on a number somewhat smaller than the $175K.

But if my SE Spreadsheet is correct (and I've cross-tested dozens of times) the Sole proprietorship still pays PR Taxes based on the $200K starting point.  That could be a lot of extra payroll taxes, especially if you are below the wage base.

I feel like this is a big deal yet I cant find any articles about it?

[spiritrider]

You are right that the SE tax calculation is marginally lower when the net business profit > the Social Security max wage base.

The IRS certainly could have chosen to design Schedule SE to use two separate paths with two different adjustment factors. One to use 0.9235 to apply 15.3% to the amount <= the SS max wage base and another one to use 0.9855 to apply 2.9% to the rest. Instead they chose to apply a single 0.9235 factor on the full amount. Then they apply the 12.4% up to the SS max wage base and 2.9% after that. Net effect you pay a marginally smaller Medicare rate at that point.

Shhhh, don't tell the IRS.

[Peter Gulia]

And does anything preclude a 100% owner from using a limited-liability company (for whatever protections it affords) while treating the company as a disregarded entity so its business stays on Schedule C?

[austin3515]

Spirit rider, what about my follow up question?

[spiritrider]

Not that I know of. It is treated as a sole proprietorship for Schedule C purposes. The only limitation that comes to mind is that in a non-community property state an LLC (even though disregarded) can not elect a "qualified joint venture".