Question

Adam Fleeman, a skilled carpenter, started a home improvement business with Tom Collins, a master plumber.  Adam and Tom are concerned about the payroll taxes they will have to pay.  Assume they form an S corporation, and each earns a salary of $80,000 from the corporation; in addition, they expect their share of business profits to be $60,000 each.  How much Social Security tax and Medicare tax (or self-employment tax) will Adam, Tom, and their corporation have to pay on their salary and profits?

 

 

Answer 1

Social security tax is deducted form an employee's wages and employer is also required to pay social security tax.In 2016, amount of social security tax that an employer has to deduct from emplyoyee's wages is 6.2% of first $ 118,500 of employee's wages , salaries. Any amount exceeding $ 118,500 is not subject to social security tax.

Statement of Social security tax:
	Salary	Social security tax @ 6.2%
Adam	$ 80,000	$ 4,960
Tom	$ 80,000	$ 4,960
Total for S corporation	$ 160,000	$ 9,920
Thus, social security tax paid by,
Adam		$ 4,960
Tom		$ 4,960
S Corporation		$ 9,920

Medicare tax: Same provision as above for social security tax is applied in Medicare tax except the limit. In other words, 1.45% is deducted from employee's entire wages and employer is also required.

Statement of medicare tax:
	Salary	Medicare tax @ 1.45%
Adam	$ 80,000	$ 1,160
Tom	$ 80,000	$ 1,160
Total for S corporation	$ 160,000	$ 2,320
Thus, medicare tax paid by,
Adam		$ 1,160
Tom		$ 1,160
S Corporation		$ 2,320