Can you pay yourself in just SEP-IRA money and avoid Social Security taxes?

Discussion in 'Tax' started by raylopez99, Sep 13, 2006.

  1. raylopez99

    raylopez99 Guest

    Facts: sole proprietor with a SEP-IRA. Wages of course by
    definition do not include SEP-IRA contributions, so any
    SEP-IRA contributions escape being taxed as wages.

    Question #1: can an employOR contribute 100% of money paid
    to the employEE as SEP-IRA money (or any other defined
    contribution-type retirement plan)? Theory: why not? if
    it complies with the < $44k/yr limit and is otherwise not
    considered "excessive"? In other words, giving $44k
    clearly would probably be excessive (correct?), if there was
    no salary paid; BUT, let's say "profits" or "money left over
    after expenses" were a measly $10k, a pittance. Can an EOR
    'pay' the EE (remember, it's one and the same person) $10k,
    by contributing to the EE's retirement fund (SEP-IRA),
    without paying FUTA, OSDI, Medicare, "Social Security taxes"
    on these "profits"? Or does the EE first have to pay a
    salary (say $5k) and then the remainder (another $5k) go to
    fund the SEP-IRA? I say that if the amount ("profits") is
    small (less than $10k-$20k), I would imagine the IRS doesn't
    care if no "Social Security taxes" are paid on this small
    amount.

    *Update: I see after typing the above that the SEP-IRA rules
    say "25% of compensation" so, given the $10k "profits", an
    EOR must first pay $7.5k as 'salary' then pay $2.5k as
    SEP-IRA contribution money. Correct?

    Is this *update correct?

    Question #2: given the sole proprietor scenario above, what
    plan (since apparently SEP-IRAs don't work due to the "25%"
    rule) allows an employor to pay 100% of any money left over
    after expenses ("profits") to the employee (himself)?

    RL

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    raylopez99, Sep 13, 2006
    #1
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  2. "raylopez99" <> wrote:

    > Facts: sole proprietor with a SEP-IRA. Wages of course by
    > definition do not include SEP-IRA contributions, so any
    > SEP-IRA contributions escape being taxed as wages.
    >
    > Question #1: can an employOR contribute 100% of money paid
    > to the employEE as SEP-IRA money (or any other defined
    > contribution-type retirement plan)? Theory: why not? if
    > it complies with the < $44k/yr limit and is otherwise not
    > considered "excessive"? In other words, giving $44k
    > clearly would probably be excessive (correct?), if there was
    > no salary paid; BUT, let's say "profits" or "money left over
    > after expenses" were a measly $10k, a pittance. Can an EOR
    > 'pay' the EE (remember, it's one and the same person) $10k,
    > by contributing to the EE's retirement fund (SEP-IRA),
    > without paying FUTA, OSDI, Medicare, "Social Security taxes"
    > on these "profits"? Or does the EE first have to pay a
    > salary (say $5k) and then the remainder (another $5k) go to
    > fund the SEP-IRA? I say that if the amount ("profits") is
    > small (less than $10k-$20k), I would imagine the IRS doesn't
    > care if no "Social Security taxes" are paid on this small
    > amount.
    >
    > *Update: I see after typing the above that the SEP-IRA rules
    > say "25% of compensation" so, given the $10k "profits", an
    > EOR must first pay $7.5k as 'salary' then pay $2.5k as
    > SEP-IRA contribution money. Correct?
    >
    > Is this *update correct?
    >
    > Question #2: given the sole proprietor scenario above, what
    > plan (since apparently SEP-IRAs don't work due to the "25%"
    > rule) allows an employor to pay 100% of any money left over
    > after expenses ("profits") to the employee (himself)?


    You are in over your head - a sole proprietor is NOT an
    employee, there is NO W-2 because there are no wages.

    A sole proprietor pays self employment tax on ALL of the net
    income from their Schedule C - whether they take the money
    out of the company or not - even whether they take out more
    than the net profit.

    For a Schedule C filer, the net income is used to calculate
    their retirement contribution. The SEP contribution
    calculation has to account for the portion of the SE tax
    that they get to deduct. There are different ways to make
    these calculations. The first, and easiest, is to use the
    IRS tables that do the conversion for you - Table 2 shows
    the rate to apply to net SE income BEFORE adjusting for SE
    tax. However, this tables only work if the net income does
    not exceed the OASDI maximum. The second method takes net
    income, reduces it by the SE tax adjustment then multiplies
    the remainder by the rate to apply to net SE income minus
    the adjustment for SE tax (Table 1).

    In any case, the sole proprietor (or SMLLC Owner) IS going
    to pay SE tax on their net income BEFORE (or regardless of)
    any contribution to a retirement plan.

    You may want to meet with a local tax pro who can help walk
    you through these calculations.

    Good luck,
    Gene E. Utterback, EA, RFC, ABA

    --
    Posted via a free Usenet account from http://www.teranews.com

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    Gene Utterback, EA, RFC, ABA, Sep 14, 2006
    #2
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  3. raylopez99

    raylopez99 Guest

    Gene Utterback, EA, RFC, ABA wrote:

    > You are in over your head - a sole proprietor is NOT an
    > employee, there is NO W-2 because there are no wages.


    Let's change the facts a bit: assume a corporation having
    one employee.

    RL

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    raylopez99, Sep 15, 2006
    #3
  4. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    raylopez99 wrote:
    > Gene Utterback, EA, RFC, ABA wrote:


    >> You are in over your head - a sole proprietor is NOT an
    >> employee, there is NO W-2 because there are no wages.


    > Let's change the facts a bit: assume a corporation having
    > one employee.


    That's simple. I "is" one! lol

    My corporation may contribute 25% of my salary into the SEP
    plan. And in my case I'm trying to reduce salary as I get
    older, so that contribution decreases each year. But I do
    save a bit in FICA tax.

    ChEar$,
    Harlan Lunsford, EA n LA

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    Harlan Lunsford, Sep 15, 2006
    #4
  5. raylopez99

    raylopez99 Guest

    Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    Harlan Lunsford wrote:
    > raylopez99 wrote:
    >> Gene Utterback, EA, RFC, ABA wrote:


    >>> You are in over your head - a sole proprietor is NOT an
    >>> employee, there is NO W-2 because there are no wages.


    >> Let's change the facts a bit: assume a corporation having
    >> one employee.


    > That's simple. I "is" one! lol
    >
    > My corporation may contribute 25% of my salary into the SEP
    > plan. And in my case I'm trying to reduce salary as I get
    > older, so that contribution decreases each year. But I do
    > save a bit in FICA tax.


    Harlan--kindly please expound

    Assume this fact: I am a sole corporation (see here:
    http://en.wikipedia.org/wiki/Corporation_sole)'

    Trust me--I have clearance from the IRS and it is 100% legal
    (long story).

    RL


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    raylopez99, Sep 17, 2006
    #5
  6. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    raylopez99 wrote:
    > Harlan Lunsford wrote:
    >> raylopez99 wrote:
    >>> Gene Utterback, EA, RFC, ABA wrote:


    >>>> You are in over your head - a sole proprietor is NOT an
    >>>> employee, there is NO W-2 because there are no wages.


    >>> Let's change the facts a bit: assume a corporation having
    >>> one employee.


    >> That's simple. I "is" one! lol
    >>
    >> My corporation may contribute 25% of my salary into the SEP
    >> plan. And in my case I'm trying to reduce salary as I get
    >> older, so that contribution decreases each year. But I do
    >> save a bit in FICA tax.


    > Harlan--kindly please expound
    >
    > Assume this fact: I am a sole corporation (see here:
    > http://en.wikipedia.org/wiki/Corporation_sole)'
    >
    > Trust me--I have clearance from the IRS and it is 100% legal
    > (long story).


    What's to explain? EXcept of course I jokingly referred to
    myself AS a corporation, which can't be of course. Legally
    I exist and the corporation I own exists, as separate person
    under the law. IOW, a natural person cannot be a
    corporation.

    As for that "sole corporation" thingy, that's a whole
    'nother ballgame.

    ChEAr$,
    Harlan Lunsford, EA n LA

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    Harlan Lunsford, Sep 19, 2006
    #6
  7. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    "raylopez99" <> wrote:
    > Harlan Lunsford wrote:
    >> raylopez99 wrote:
    >>> Gene Utterback, EA, RFC, ABA wrote:


    >>>> You are in over your head - a sole proprietor is NOT an
    >>>> employee, there is NO W-2 because there are no wages.


    >>> Let's change the facts a bit: assume a corporation having
    >>> one employee.


    >> That's simple. I "is" one! lol
    >>
    >> My corporation may contribute 25% of my salary into the SEP
    >> plan. And in my case I'm trying to reduce salary as I get
    >> older, so that contribution decreases each year. But I do
    >> save a bit in FICA tax.


    > Harlan--kindly please expound
    >
    > Assume this fact: I am a sole corporation (see here:
    > http://en.wikipedia.org/wiki/Corporation_sole)'
    >
    > Trust me--I have clearance from the IRS and it is 100% legal
    > (long story).


    See the IRS' Dirty Dozen, number 7:

    http://www.irs.gov/newsroom/article/0,,id=136337,00.html

    If this is what you mean by "sole corporation" then I
    recommend you speak with a tax attorney with criminal
    experience ASAP. If not then please elaborate.

    ---
    Drew Edmundson, CPA
    Cary, NC

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    << nor can it used, for the purpose of avoiding penalties >>
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    Drew Edmundson, Sep 19, 2006
    #7
  8. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    "raylopez99" <> wrote:
    > Harlan Lunsford wrote:
    >> raylopez99 wrote:
    >>> Gene Utterback, EA, RFC, ABA wrote:


    >>>> You are in over your head - a sole proprietor is NOT an
    >>>> employee, there is NO W-2 because there are no wages.


    >>> Let's change the facts a bit: assume a corporation having
    >>> one employee.


    >> That's simple. I "is" one! lol
    >>
    >> My corporation may contribute 25% of my salary into the SEP
    >> plan. And in my case I'm trying to reduce salary as I get
    >> older, so that contribution decreases each year. But I do
    >> save a bit in FICA tax.


    > Harlan--kindly please expound
    >
    > Assume this fact: I am a sole corporation (see here:
    > http://en.wikipedia.org/wiki/Corporation_sole)'
    >
    > Trust me--I have clearance from the IRS and it is 100% legal
    > (long story).


    I apologize if this is a duplicate. It did not post with
    the rest of the messages today and I sent it early
    yesterday.

    See the IRS' Dirty Dozen, number 7:

    http://www.irs.gov/newsroom/article/0,,id=136337,00.html

    If this is what you mean by "sole corporation" then I
    recommend you speak with a tax attorney with criminal
    experience ASAP. If not then please elaborate.

    ---
    Drew Edmundson, CPA
    Cary, NC

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    << nor can it used, for the purpose of avoiding penalties >>
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    Drew Edmundson, Sep 21, 2006
    #8
  9. raylopez99

    raylopez99 Guest

    Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    >> Trust me--I have clearance from the IRS and it is 100% legal
    >> (long story).


    > See the IRS' Dirty Dozen, number 7:
    >
    > http://www.irs.gov/newsroom/article/0,,id=136337,00.html
    >
    > If this is what you mean by "sole corporation" then I
    > recommend you speak with a tax attorney with criminal
    > experience ASAP. If not then please elaborate.


    Hi Drew--certain states, CA being one of them, allow certain
    professions the right to form a corp. sole (and you don't
    even have to be a priest, rabbi or shaman).

    RL

    PS--after doing lots of due diligence, I've concluded that
    it's probably better to pay FICA/Social security taxes on
    any "taxable compensation" and pass through said
    compensation as "wages" rather than try to use said
    compensation to fund a retirement plan. Of course up to 25%
    of said "taxable compensation" could be used to fund a
    retirement plan (401k/ SEP-IRA, etc) and I might declare a
    special dividend this year, and avoid paying FICA/SS tax
    that way.

    Thanks.

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    << to this newsgroup as well as our anti-spamming policy >>
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    raylopez99, Sep 21, 2006
    #9
  10. raylopez99

    Bill Brown Guest

    Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    MoTHIS THREAD IS CLAOSED AS OF TODAY
    ============================================
    raylopez99 wrote:

    > Assume this fact: I am a sole corporation (see here:
    > http://en.wikipedia.org/wiki/Corporation_sole)'



    I went to that link and found this:

    **BEGIN QUOTE**

    Wikipedia is not an advertising service. Promotional
    articles about yourself, your friends, your company or
    products; or articles written as part of a marketing or
    promotional campaign, may be deleted in accordance with our
    deletion policies. For more information, see Wikipedia:Spam.

    **END QUOTE**

    > Trust me--I have clearance from the IRS and it is 100% legal
    > (long story).


    I wouldn't trust you as far as I could throw the building my
    office is in. And, no you don't and no it isn't.

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    Bill Brown, Sep 21, 2006
    #10
  11. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    "raylopez99" <> wrote:

    >>> Trust me--I have clearance from the IRS and it is 100% legal
    >>> (long story).


    >> See the IRS' Dirty Dozen, number 7:
    >>
    >> http://www.irs.gov/newsroom/article/0,,id=136337,00.html
    >>
    >> If this is what you mean by "sole corporation" then I
    >> recommend you speak with a tax attorney with criminal
    >> experience ASAP. If not then please elaborate.


    > Hi Drew--certain states, CA being one of them, allow certain
    > professions the right to form a corp. sole (and you don't
    > even have to be a priest, rabbi or shaman).


    The IRS is not questioning the right to form a Corporate
    Sole. What they object to is the alleged tax benefits.
    Plenty of promoters of Corporate Soles are now or have been
    guests of a federal penitentiary.

    AFAIK all states allow professions to form a professional
    corporation that has one owner. But this is NOT a Corporate
    Sole.

    ---
    Drew Edmundson, CPA
    Cary, NC

    << ======================================================= >>
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    << nor can it used, for the purpose of avoiding penalties >>
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    Drew Edmundson, Sep 21, 2006
    #11
  12. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    Drew Edmundson wrote:

    > See the IRS' Dirty Dozen, number 7:
    >
    > http://www.irs.gov/newsroom/article/0,,id=136337,00.html
    >
    > If this is what you mean by "sole corporation" then I
    > recommend you speak with a tax attorney with criminal
    > experience ASAP. If not then please elaborate.


    And I would recommend he even save his money an attorney
    might charge for the consultation, and not even consider
    such a thing. (grin)

    ChEAr$,
    Harl

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    Harlan Lunsford, Sep 22, 2006
    #12
  13. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    >>> Trust me--I have clearance from the IRS and it is 100% legal
    >>> (long story).


    >> See the IRS' Dirty Dozen, number 7:
    >>
    >> http://www.irs.gov/newsroom/article/0,,id=136337,00.html
    >>
    >> If this is what you mean by "sole corporation" then I
    >> recommend you speak with a tax attorney with criminal
    >> experience ASAP. If not then please elaborate.


    > Hi Drew--certain states, CA being one of them, allow certain
    > professions the right to form a corp. sole (and you don't
    > even have to be a priest, rabbi or shaman).
    >
    > RL
    >
    > PS--after doing lots of due diligence, I've concluded that
    > it's probably better to pay FICA/Social security taxes on
    > any "taxable compensation" and pass through said
    > compensation as "wages" rather than try to use said
    > compensation to fund a retirement plan. Of course up to 25%
    > of said "taxable compensation" could be used to fund a
    > retirement plan (401k/ SEP-IRA, etc) and I might declare a
    > special dividend this year, and avoid paying FICA/SS tax
    > that way.


    After reading the above paragraph I take it you're going to
    pay the FICA/social security on the compensation and then
    pay it to the corporation and then again pay it out in
    taxable wages to yourself?

    That's counterproductive and will cost you a lot. In fact I
    think you ought to contact a local tax professional, either
    an Enrolled Agent (EA) or Certified public account (CPA), in
    your area. Maybe he can explain it better face to face.

    ChEAR$,
    Harlan Lunsford, EA n LA

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    Harlan Lunsford, Sep 22, 2006
    #13
  14. raylopez99

    fred jorden Guest

    Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    If I form a corporate sole can I sell it to El Diablo?

    --
    Frederick E. Jorden
    http://Tax-Accounting-Payroll.com
    7825 Midlothian Tpk - 207
    Richmond, VA 23235-5247
    EMAIL
    (804) 320-6210 FAX (804) 320-6211

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    fred jorden, Sep 22, 2006
    #14
  15. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    "fred jorden" <> wrote:

    > If I form a corporate sole can I sell it to El Diablo?


    No, technically you have no ownership interest. There in
    fact is no "owner." The closest thing to an owner there is,
    is the state, which provides for creation of such an entity.

    Stu

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    Stuart A. Bronstein, Sep 23, 2006
    #15
  16. raylopez99

    raylopez99 Guest

    Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    >> Hi Drew--certain states, CA being one of them, allow certain
    >> professions the right to form a corp. sole (and you don't
    >> even have to be a priest, rabbi or shaman).


    > The IRS is not questioning the right to form a Corporate
    > Sole. What they object to is the alleged tax benefits.
    > Plenty of promoters of Corporate Soles are now or have been
    > guests of a federal penitentiary.
    >
    > AFAIK all states allow professions to form a professional
    > corporation that has one owner. But this is NOT a Corporate
    > Sole.


    Thanks. If, given I am a professional corporation that has
    one owner, you can figure out a way I can contribute 100%
    (or a sizeable portion) of my "profits" (money after
    expenses) to my retirement fund (401k and/or SEP-IRA),
    without having to pay FICA, FUTA, ss/medicare taxes
    ("payroll taxes"), please let me know. I only know of
    declaring a dividend to avoid these "payroll" taxes, and the
    dividend has to be kind of small as I recall from memory
    (less than $10k comes to mind, though I don't know where I
    picked that up from). Otherwise, if you declare 100% (or a
    sizeable portion) of your "profits" without paying payroll
    taxes, I think you get audited by the IRS, or at least
    increase your red flags.

    Obviously I don't do accounting or tax stuff for a
    living--if you do, hats off to ya.

    Cheers,

    RL

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    raylopez99, Sep 23, 2006
    #16
  17. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    raylopez99 wrote:

    > Thanks. If, given I am a professional corporation that has
    > one owner, you can figure out a way I can contribute 100%
    > (or a sizeable portion) of my "profits" (money after
    > expenses) to my retirement fund (401k and/or SEP-IRA),
    > without having to pay FICA, FUTA, ss/medicare taxes
    > ("payroll taxes"), please let me know.


    And copy this newsgroup, too. IMWTK.

    > I only know of
    > declaring a dividend to avoid these "payroll" taxes, and the
    > dividend has to be kind of small as I recall from memory
    > (less than $10k comes to mind, though I don't know where I
    > picked that up from).


    I dunno either. never heard of such. It's not even in my
    original tax research book, a 1956 Prentice Hall Tax Guide.

    > Otherwise, if you declare 100% (or a
    > sizeable portion) of your "profits" without paying payroll
    > taxes, I think you get audited by the IRS, or at least
    > increase your red flags.


    Again, please get competent local tax help.

    ChEAr$,
    Harlan Lunsford, EA n LA

    << ======================================================= >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    Harlan Lunsford, Sep 25, 2006
    #17
  18. raylopez99

    raylopez99 Guest

    Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    >> PS--after doing lots of due diligence, I've concluded that
    >> it's probably better to pay FICA/Social security taxes on
    >> any "taxable compensation" and pass through said
    >> compensation as "wages" rather than try to use said
    >> compensation to fund a retirement plan. Of course up to 25%
    >> of said "taxable compensation" could be used to fund a
    >> retirement plan (401k/ SEP-IRA, etc) and I might declare a
    >> special dividend this year, and avoid paying FICA/SS tax
    >> that way.


    > After reading the above paragraph I take it you're going to
    > pay the FICA/social security on the compensation and then
    > pay it to the corporation and then again pay it out in
    > taxable wages to yourself?
    >
    > That's counterproductive and will cost you a lot. In fact I
    > think you ought to contact a local tax professional, either
    > an Enrolled Agent (EA) or Certified public account (CPA), in
    > your area. Maybe he can explain it better face to face.


    No, the plan is to pay the employee (one, myself, the sole
    owner of an S-corp) 'retirement' monies (401k, SEP-IRA,etc)
    and not pay payroll (and thus not pay payroll taxes). But
    since I can't find any clear information on the internet,
    probably because it's so rare, not that it's illegal, I'll
    probably go for the traditional formula of 25% retirement
    money/ 75% wages paid.

    RL

    << ======================================================= >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    raylopez99, Sep 25, 2006
    #18
  19. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    >>> PS--after doing lots of due diligence, I've concluded that
    >>> it's probably better to pay FICA/Social security taxes on
    >>> any "taxable compensation" and pass through said
    >>> compensation as "wages" rather than try to use said
    >>> compensation to fund a retirement plan. Of course up to 25%
    >>> of said "taxable compensation" could be used to fund a
    >>> retirement plan (401k/ SEP-IRA, etc) and I might declare a
    >>> special dividend this year, and avoid paying FICA/SS tax
    >>> that way.


    >> After reading the above paragraph I take it you're going to
    >> pay the FICA/social security on the compensation and then
    >> pay it to the corporation and then again pay it out in
    >> taxable wages to yourself?
    >>
    >> That's counterproductive and will cost you a lot. In fact I
    >> think you ought to contact a local tax professional, either
    >> an Enrolled Agent (EA) or Certified public account (CPA), in
    >> your area. Maybe he can explain it better face to face.


    > No, the plan is to pay the employee (one, myself, the sole
    > owner of an S-corp) 'retirement' monies (401k, SEP-IRA,etc)
    > and not pay payroll (and thus not pay payroll taxes). But
    > since I can't find any clear information on the internet,
    > probably because it's so rare, not that it's illegal, I'll
    > probably go for the traditional formula of 25% retirement
    > money/ 75% wages paid.


    Perhaps you would have received a better answer before now
    if you hadn't used the dirty words "corporate sole." To
    answer your question, retirement contributions are based
    upon compensation. Compensation is, by definition, typically
    subject to Social Security and Medicare taxes (with the SS
    tax being limited to the first $X of wages - X is indexed so
    it changes every year).

    So what you propose, no payroll but a retirement
    contribution is illegal and that is why you don't see a lot
    about it on the Internet.

    As a very general reference, please note the title to
    Subchapter D is "Deferred Compensation, etc." It covers
    Sections 401 to 436 which discuss the rules for retirement
    plans.

    ---
    Drew Edmundson, CPA
    Cary, NC

    << ======================================================= >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    Drew Edmundson, Sep 26, 2006
    #19
  20. Re: Can you pay yourself in just SEP-IRA money and avoid Social Security

    >>> PS--after doing lots of due diligence, I've concluded that
    >>> it's probably better to pay FICA/Social security taxes on
    >>> any "taxable compensation" and pass through said
    >>> compensation as "wages" rather than try to use said
    >>> compensation to fund a retirement plan. Of course up to 25%
    >>> of said "taxable compensation" could be used to fund a
    >>> retirement plan (401k/ SEP-IRA, etc) and I might declare a
    >>> special dividend this year, and avoid paying FICA/SS tax
    >>> that way.


    >> After reading the above paragraph I take it you're going to
    >> pay the FICA/social security on the compensation and then
    >> pay it to the corporation and then again pay it out in
    >> taxable wages to yourself?
    >>
    >> That's counterproductive and will cost you a lot. In fact I
    >> think you ought to contact a local tax professional, either
    >> an Enrolled Agent (EA) or Certified public account (CPA), in
    >> your area. Maybe he can explain it better face to face.


    > No, the plan is to pay the employee (one, myself, the sole
    > owner of an S-corp) 'retirement' monies (401k, SEP-IRA,etc)
    > and not pay payroll (and thus not pay payroll taxes). But
    > since I can't find any clear information on the internet,
    > probably because it's so rare, not that it's illegal, I'll
    > probably go for the traditional formula of 25% retirement
    > money/ 75% wages paid.


    One more try. the 25% is based on the actual salary you are
    paid, and not on profits. you don't just divide up the
    profits 75/25. If you've had 100,000$ profit before your
    salary, and on Dec 31st pay yourself a salary of 60,000$,
    then maximum contribution, subject of course to provisions
    of the plan, will be a max of 15,000$.

    And that's where you need help from a competent local tax
    pro.

    That's all.

    ChEAr$,
    Harlan Lunsford, EA n LA

    << ======================================================= >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    Harlan Lunsford, Sep 26, 2006
    #20
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