If I own my company and pay myself 1099 income....do I have to pay social security or just income tax?

Depends on how you're setup. If you elect to be an s-corp, you would pay yourself a "reasonable salary" which will be subject to employment taxes and then distribute money to yourself as a dividend that you would only pay income tax on.

You have to pay self employment tax if you get a 1099. The only way you can get away from not paying self employment is if you work for a majority foreign owned company and not working in the USA.

Can you not pay yourself a salary & just take owner draws?

We were an S-Corp & 100% owned by us so only one of us Schwacks took a salary for many years to avoid 2 SS payments. About 5 years out from retirement, the Mrs. started drawing a salary because we needed to pay us more based on what was coming in & since we'd have to put more into SS anyway, we thought it best for her to rack up some more money in her account should it be there when she's ready to draw.

I take the very minimum in salary in an S corp. but have never tried only taking draws. That would be sweet.

If you're actively engaged you have to take some salary. What's "reasonable"? It depends, but you can get in trouble. Talk to an accountant.

"Reasonable Salary"

This comes up often w/r/t S Corps and their officer/shareholders.

Pay yourself anything less than what you pay your broom pusher and it will probably be considered 'unreasonable', unless you're stacking up business losses, of course.

Guys get in trouble when they work 60-hour weeks, take no salary, and have $200K in distributions.

Yes, you can reduce the employment tax burden by using S Corps, but you have to be smart about it.

Pigs get fed, while hogs get slaughtered.

I do a ~1/3 of my invoicing as salary and the rest as distribution.

Real estate rental income is not subject to self employment tax. Ex: an individual owns real estate property and leases it to a partnership or LLC the individual is a parter/member of. The rental income is subject to income tax but not self employment tax.
Or if the real estate is rented to another party.

IrishTxAggie said:

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I do a ~1/3 of my invoicing as salary and the rest as distribution.

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This is probably not a bad rule of thumb.

As a CPA, I've never been tested on anything above the SS max and up to the ACA kick-in. At that point the IRS is arguing over effectively around 6% (employer and employee medicare less assumed max rate tax deduction for employer side) for just the amount over 250k (assuming MFJ). Most dumb agents aren't going to have this argument and the smart ones see that their time is better spent on lower hanging fruit instead of way high up in the tree.
But at the end of the day it depends on circumstances.

Quote:

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Real estate rental income is not subject to self employment tax.

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Oh yeah, we charged our company rent and that added to our household income when we were only drawing one salary.

Eventually there did come a point on the "unreasonable" salary question where we had to start paying both of us. Decent "problem" to have.

Mas89 said:

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Real estate rental income is not subject to self employment tax. Ex: an individual owns real estate property and leases it to a partnership or LLC the individual is a parter/member of. The rental income is subject to income tax but not self employment tax.
Or if the real estate is rented to another party.

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I agree you do not pay social security tax on unearned income. I don't believe you get a 1099 for such things, correct me if I am wrong. If you generally get a 1099 it is for earned income and you have to pay social security tax/self employment tax on earned income.

I have a friend of mine that got nailed by the IRS for taking a salary as dividends from his company and thus only pay cap gains tax. He had a hefty penalty and had to pay back owed self employment tax as well. Be careful on such things. Personally I will go out of the way not to have to deal with the morons in the IRS.

In Houston and taking any clients? I think mine is hanging up his gloves after this year.

IrishTxAggie said:

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In Houston and taking any clients? I think mine is hanging up his gloves after this year.

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I work in the Galleria. Always accepting new clients and willing to take a meeting with an Ag. Email is in profile.

drill4oil78 said:

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Mas89 said:

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Real estate rental income is not subject to self employment tax. Ex: an individual owns real estate property and leases it to a partnership or LLC the individual is a parter/member of. The rental income is subject to income tax but not self employment tax.
Or if the real estate is rented to another party.

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I agree you do not pay social security tax on unearned income. I don't believe you get a 1099 for such things, correct me if I am wrong. If you generally get a 1099 it is for earned income and you have to pay social security tax/self employment tax on earned income.

I have a friend of mine that got nailed by the IRS for taking a salary as dividends from his company and thus only pay cap gains tax. He had a hefty penalty and had to pay back owed self employment tax as well. Be careful on such things. Personally I will go out of the way not to have to deal with the morons in the IRS.

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On the 1099-MISC there are boxes for Rent (box 1), Royalties (box 2), Other income (box 3 and may or may not be earned or unearned). Box 7 in Non-employee compensation and is considered earned income.


What your friend did was probably out of a C-Corp (non pass-through). And yes there are several old tax and supreme court cases slapping the crap out of taxpayers who did this exact thing (one of which was a CPA firm). It isn't a loophole and arguably the low hanging fruit. Frankly, if he had someone else preparing his returns I wouldn't be shocked to see them also get hit with preparer penalties.

Should rename your thread to "Minimizing Social Security" because whether SS or self-employment tax, they're going to get something out of you.

you have to pay both - can reduce SS tax by being an S corp - some can eliminate the SS tax for a couple of years when starting a new biz

self employment tax = social security

Everyone answered your questions, but wanted to give you the lingo of tax folks and regular folks

With some CPAs that I have asked, they will go 50/50 on draws and salary. Is that the most aggressive on their own comfort level or is it some rule of thumb talked about at conventions?

I have a side business that i take 100% distributions on (about 40-50k per year). I have an employee, and she does all the work. I work zero hours a week on the business.

Harkrider 93 said:

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With some CPAs that I have asked, they will go 50/50 on draws and salary. Is that the most aggressive on their own comfort level or is it some rule of thumb talked about at conventions?

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The short answer is it just depends. I have heard the 50/50 discussed in seminars/conferences, I don't necessarily follow that though. If someone is making 100k between draws and salary a 50/50 approach is probably fair.
I've also had discussions with one of the most up to date tax instructors in the state that also takes a facts and circumstances approach (basically being flexible in what that might be). On someone pulling 750k+ out of an S-Corp, my recommendation is around the ACA max (250k) and in the last 5 years of doing that I haven't been informed of any issues. **Knocks loudly on wood**
Now a MD trying to only take a salary of 50k on 1.2 million distributions. Yeah that isn't going to work.

At the end of the day I can only advise my clients on the necessity of what may be considered a "reasonable" salary. However, it is a lot easier to convince clients of a larger reasonable number that want to stuff the most money possible into retirement plans though.

So if I understand correctly, distributions from an LLC are not taxed as earned income, but rather at 15%?

Or are they not taxed at all? Google search is yielding me conflicting info...?

BoDog said:

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So if I understand correctly, distributions from an LLC are not taxed as earned income, but rather at 15%?

Or are they not taxed at all? Google search is yielding me conflicting info...?

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No. LLC's and S Corps are what the IRS calls "pass through" entities which means their income is passed through to the owner's tax return(s) and the owner pays the taxes. A single member LLC files a Schedule C on the owner's 1040. A multi-member LLC files a 1065 and an S-Corp files a 1120S and each of them gives the owners K-1's which is then added to their 1040.

All income from a pass through business is subject to income tax. All of it. What an S Corp allows the owner to do is shield some of it from self-employment (SS and Medicare) taxes by paying themselves some of the earnings as salary and the rest as distributions.

Here's the way I explain it to my clients. What do we expect net income to be before you get paid? OK, let's pay you about half of that in salary and you can take the rest in distributions. You will pay income tax on both sides of that but self-employment on only the salary.

RebelgentlemenE2 said:

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If I own my company and pay myself 1099 income....do I have to pay social security or just income tax?

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I want to directly address how you phrased the question so you don't cause problems for yourself. if you own your own company you do not pay yourself 1099 income. Assuming you're the sole owner of an LLC based on how you phrased the question you and the company are the same entity in the IRS' eyes. An LLC does not send it's owner's 1099's. All income is subject to income and self-employment taxes.