Question

dave and his friend stewart each owns 50 percent of kbs. during the year, dave received $84,000 compensation for services he performed for kbs during the year. he performed a significant amount of work for the entity, and he was heavily involved in management decisions for the entity (he was not a passive investor in kbs). after deducting dave's compensation, kbs reported taxable income of $33,600.how much fica and/or self-employment tax is dave required to pay on his compensation and his share of the kbs income if kbs is formed as a c corporation, an s corporation, or a limited liability company (taxed as a partnership) (ignore the 0.9 percent additional medicare tax)? how much fica tax would the entity be required to pay on the compensation paid to dave?

Answer 1

Dave's tax obligations for FICA and/or self-employment tax depend on the entity type of KBS. If KBS is a C Corp or an S Corp, he pays FICA on his salary with the corporation matching these contributions. As an LLC owner, he would have self-employment tax on his income along with FICA on salary.

Step-by-step explanation:

When considering the amount of FICA and/or self-employment tax Dave is required to pay on his compensation as an officer and his share of KBS taxable income, we need to assess the structure of KBS because tax implications vary by entity type:

• If KBS is a C Corporation, Dave will pay FICA taxes on his $84,000 compensation but not on the $33,600 taxable income, as corporate profits are not subject to self-employment taxes.
• As an S Corporation, Dave would still pay FICA taxes on his compensation, but may not have to pay self-employment taxes on the $33,600 if it's not considered earned income for services provided.
• For a Limited Liability Company (taxed as a partnership), Dave would be subject to self-employment taxes on his distributive share of the $33,600 taxable income, in addition to FICA taxes on his compensation.

The entity itself (C Corporation or S Corporation) would be required to pay FICA taxes on the compensation paid to Dave, which typically includes an employer portion of Social Security and Medicare taxes.

Specifically, for the $84,000 compensation, both Dave and the entity are responsible for a 6.2% Social Security tax (up to the income threshold) and a 1.45% Medicare tax, totaling 7.65% each. The Social Security tax is only up to an income of $113,000, so it is considered a regressive tax, where higher income earners pay a smaller percentage of their income compared to lower income earners.

If Dave were an independent contractor or self-employed and KBS were a non-incorporated business, he would be responsible for both the employee and employer portions of the payroll taxes, effectively paying a combined rate for Social Security and Medicare of 15.3% on his net earnings from self-employment.