Lightner & Stickel CPAs, Inc.- Valued by our clients.

Last Updated July 15, 2010

S-Corporation Self Employment Tax

A 2011 proposed self employment tax hike looms for S-Corporation owners. The tax will apply to all profits of service firms starting next year.

Small personal service S-Corporations will be taxed where the principal asset is the reputation and skill of three or fewer workers. Owners of S-Corporations that are partners in a service partnership will owe self employment tax on their entire profit. Currently, the tax is 15.3% of the first $106,800 in profits and 2.9% above that.

The profits of small S-Corporations in the following fields will be subject to self employment tax: Accounting, Law, Health, Actuarial Science, Engineering, Architecture, Lobbying, Consulting, Brokerage Services, Investment Management, Sports, and Performing Arts.

This change will end a popular self employment tax saver for personal service S-Corporations, taking a modest salary and receiving the rest of the profit as a dividend subject only to income tax

Issuing 1099 Forms

Don’t wait to be audited before filing 1099 forms on contract workers. That will put your company on the hook for payroll taxes. Under a 1978 law, the IRS can’t reclassify contractors as employees if a company filed 1099’s on them, consistently treated similar workers as contractors and had a reasonable basis to do so. But an Appeals Court says that if the company didn’t initially give 1099 forms to the worker, it will not qualify for relief if the 1099’s are issued after the IRS bills it for back employment taxes.

If the IRS reclassifies your contractors as employees after an audit, reduced penalties apply if the worker misclassification was unintentional. The income tax withholding penalty is only 1.5% of wages, far below the normal level. The tax rate for the employee’s share of FICA tax is 1.53% instead of 7.65%. The percentages double if, 1099 forms weren’t filed for the workers. There is no relief for the employer’s share of FICA, it remains at 7.65%

Health Care Provided Displayed on W-2’s

Beginning with the 2011 tax year you will be required to display the employer provided health care on the W-2’s. You may want to start addressing the issue of tracking health care benefits before the end of the year. This will help you be prepared to start tracking the information at the beginning of the year to ensure compliance with the new tax rules.

Tax Changes for 2010

In 2010, the domestic production activities deduction increase to 9% of qualifying business net income. This deduction applies to businesses engaged in construction, engineering or architectural services, film production, or the lease, rental or sale of equipment you manufactured. However, the rate remains at 6% for oil and gas companies.

The maximum Section 179 expense deduction for equipment placed in service during 2010 that a business can expense drops by nearly 50%, to $135,000 from $250,000 in previous years. This change could affect your equipment purchases planned before the end of the year.

Tax Rate Changes for 2011

There are a number of personal tax rate changes for 2011 that could affect your business decisions. The tax on long term capital gains will be increasing from the current 15% to 20%.

Increases in the marginal tax rates are proposed for 2011. The married filing joint top marginal rates are:

2010

2011

33% - Taxable Income $208,851

36% - Taxable Income $230,000

35% - Taxable Income $373,650

39.6% - Taxable Income $375,000

These key tax rate increases could drastically affect your tax liability for 2011. There may be some opportunities to take advantage of the lower 2010 tax rates. Now is the time to prepare for the tax increase. Please contact our office to set up a tax planning meeting.