Taxes (GOP 2017 edition)

[gatoveintisiete]

Sys, you’re usually pretty good at this, but there are a couple pretty bad takes in the above.

So is this a cliffhanger?  Do yo think I have time for this crap?

[catastrophe]

anything can be an s corp. 

According to the IRS:

To qualify for S corporation status, the corporation must meet the following requirements:

Be a domestic corporation
Have only allowable shareholders
May be individuals, certain trusts, and estates and
May not be partnerships, corporations or non-resident alien shareholders
Have no more than 100 shareholders
Have only one class of stock
Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

i have a guy at work who tells me almost every day that i should turn myself into an s corp.  "shareholders" in an s corp pay tax on profits as ordinary income.  the tax break is that they don't have to pay payroll taxes.  that's why people turn themselves into s corps, to pay themselves a wage that is less than their profit and only pay payroll taxes on the wage part of their profit.

I know this has been discussed before, but I really think you should get a qualified opinion on this.  If you are an employee, your employer is almost certainly required to withhold payroll taxes from your income.  Does not matter whether you are a flesh and blood person or an s-corp.  I mean, if we employ a nanny for more than $2,000/year we are required to withhold payroll taxes.

the pass through tax breaks are pretty much a huge scam that r johnson and his ilk assume people are too dumb to figure out because americans instinctively hate big businesses (c corps) and fellate small businesses (pass throughs). 

Yes, practically all small businesses are pass-throughs, but tons of big businesses are too.  Publicly traded partnerships are actually becoming a popular business model because it allows businesses to be governed almost entirely by contract. (https://www.irs.gov/individuals/international-taxpayers/publicly-traded-partnerships).  And, if you organize in Delaware at least, they can specifically disclaim most fiduciary duties. 

Also, if you look at the organizational structure of almost any huge business you will see that they actually operate through LLCs and LPs mostly.  The top entity is usually a INC, but the ones actively bringing in the income are not.

99.9% of pass throughs aren't comparable to c corps, they're comparable to wage earners.

I'm not sure exactly how to look this figure up, but...come on.

[hjfklmor]

Sys' "guy at work" strategy is potentially one that will be used to game the new passthrough deduction.

There is technically nothing in the language of the Senate bill that prevents employees from forming their own partnership and having that partnership contract with their employer, allowing them to take the passthrough deduction proposed in the Senate.

For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.

Its a risky strategy, and the IRS would likely litigate and there's a decent change you would lose, but considering the IRS is incredibly poorly funded it will probably take them a while, if ever, to notice. I guarantee people will be doing this if that section goes through as it is currently written.

[K-S-U-Wildcats!]

What sys said is partially right, and partially wrong. It is true that one tax advantage of s-corps is being able to avoid payroll tax on "profit," but the IRS has some rules about how much of your distribution you can classify as profit versus wage. This tax advantage probably isn't as a big a deal as it seems given that payroll tax already caps out at approx. $115k.

The other advantage is no corporate income tax, which actually seems like a bigger advantage.

Many businesses are far too big to be s-corps, but just about any individual could form an s-corp. You'd just have to jump through the hoops of incorporating, pay your annual registration fees, etc.

But if you're thinking anybody can just switch from being a wage-earning employee to an s-corp independent contractor with your employer, no it doesn't work that way. The IRS anticipated this and has rules against it. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

Moreover, even if your employer allowed you to do this, let's say you suddenly reclassified have of what used to be your wage as "profit." You really think that would fly with the IRS? You might not get caught, but that doesn't make it legal.

I agree that heaping on additional tax breaks for pass-through entities, especially under the House way of doing it (setting a max rate that would have been lower than the marginal personal income tax rate for high earners), was basically a huge giveaway to wealthy attorneys, doctors, and other typical pass-through recipients. As I said, I'm all for reducing taxes on the wealthy - I just don't see any meaningful reason to reduce one guy's taxes more than another, both making the same money, just because one is an s-corp recipient versus a wage earner.

It the goal is really to help small businesses, the Senate plan (which appears to be what has made it into the compromise bill) is the better way to do it: offering a deduction that makes more of that lower income tax free.

[catastrophe]

For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.

You would be hard pressed to find a company able to otherwise pay its employees $200k but be willing to go in on a scheme like this.  Why not just make everyone a partner with a limited voting interest since just about every law firm is organized as an LLP anyway?

[K-S-U-Wildcats!]

Sys' "guy at work" strategy is potentially one that will be used to game the new passthrough deduction.

There is technically nothing in the language of the Senate bill that prevents employees from forming their own partnership and having that partnership contract with their employer, allowing them to take the passthrough deduction proposed in the Senate.

For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.

Its a risky strategy, and the IRS would likely litigate and there's a decent change you would lose, but considering the IRS is incredibly poorly funded it will probably take them a while, if ever, to notice. I guarantee people will be doing this if that section goes through as it is currently written.

People will try, and they will lose. Because they won't truly be "independent contractors." As I mentioned above, the IRS already has rules against this. Start with this....

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:
1) Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2) Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

[hjfklmor]

For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.

You would be hard pressed to find a company able to otherwise pay its employees $200k but be willing to go in on a scheme like this.  Why not just make everyone a partner with a limited voting interest?

That would also be a solution, and probably a better one, but in my experience most places would rather go in on a scheme like this than have associates be considered partners of any kind, especially when most law firms like my example put a pretty large emphasis on profits per partner.

[hjfklmor]

Sys' "guy at work" strategy is potentially one that will be used to game the new passthrough deduction.

There is technically nothing in the language of the Senate bill that prevents employees from forming their own partnership and having that partnership contract with their employer, allowing them to take the passthrough deduction proposed in the Senate.

For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.

Its a risky strategy, and the IRS would likely litigate and there's a decent change you would lose, but considering the IRS is incredibly poorly funded it will probably take them a while, if ever, to notice. I guarantee people will be doing this if that section goes through as it is currently written.

People will try, and they will lose. Because they won't truly be "independent contractors." As I mentioned above, the IRS already has rules against this.

The FAQ page from IRS.gov you linked is overly simplified. This independent contractor scheme already exists for partnerships currently. People who don't want to pay SE tax on their partnership earnings form an S corp to be a partner in their partnership and pay themselves a wage from the S corp.

[Dugout DickStone]

Sys' "guy at work" strategy is potentially one that will be used to game the new passthrough deduction.

There is technically nothing in the language of the Senate bill that prevents employees from forming their own partnership and having that partnership contract with their employer, allowing them to take the passthrough deduction proposed in the Senate.

For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.

Its a risky strategy, and the IRS would likely litigate and there's a decent change you would lose, but considering the IRS is incredibly poorly funded it will probably take them a while, if ever, to notice. I guarantee people will be doing this if that section goes through as it is currently written.

cool then they can also set up their own 401 k (and match it themselves) and get their own health insurance.  I'd love that

[hjfklmor]

Sys' "guy at work" strategy is potentially one that will be used to game the new passthrough deduction.

There is technically nothing in the language of the Senate bill that prevents employees from forming their own partnership and having that partnership contract with their employer, allowing them to take the passthrough deduction proposed in the Senate.

For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.

Its a risky strategy, and the IRS would likely litigate and there's a decent change you would lose, but considering the IRS is incredibly poorly funded it will probably take them a while, if ever, to notice. I guarantee people will be doing this if that section goes through as it is currently written.

cool then they can also set up their own 401 k (and match it themselves) and get their own health insurance.  I'd love that

I don't recommend doing any of this by the way, its overly complicated for the benefit you get. I'm just pointing out that there are ways to game the new rules and because we are all in a tizzy to get things passed by Christmas, no one seems to care or they are making it the problem of an already overburdened IRS.

[Cire]

My sister in law is in financial tech industry, shes gamed the crap out of this stuff for years as an independent contractor. I think she’s working on a federal project now where they are building databases for the sec or something.


Sent from my iPad using Tapatalk

[Dugout DickStone]

Sys' "guy at work" strategy is potentially one that will be used to game the new passthrough deduction.

There is technically nothing in the language of the Senate bill that prevents employees from forming their own partnership and having that partnership contract with their employer, allowing them to take the passthrough deduction proposed in the Senate.

For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.

Its a risky strategy, and the IRS would likely litigate and there's a decent change you would lose, but considering the IRS is incredibly poorly funded it will probably take them a while, if ever, to notice. I guarantee people will be doing this if that section goes through as it is currently written.

cool then they can also set up their own 401 k (and match it themselves) and get their own health insurance.  I'd love that

I don't recommend doing any of this by the way, its overly complicated for the benefit you get. I'm just pointing out that there are ways to game the new rules and because we are all in a tizzy to get things passed by Christmas, no one seems to care or they are making it the problem of an already overburdened IRS.

No one is actually doing this but it is not a new concept.  I think it would be an interesting solution for associates who don't have what it takes to make partner and will stay at w-2 status but would like to get some tax advantages

[catastrophe]

For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.

You would be hard pressed to find a company able to otherwise pay its employees $200k but be willing to go in on a scheme like this.  Why not just make everyone a partner with a limited voting interest?

That would also be a solution, and probably a better one, but in my experience most places would rather go in on a scheme like this than have associates be considered partners of any kind, especially when most law firms like my example put a pretty large emphasis on profits per partner.

Yea, but for the same reason I think they'd prefer to keep the profit sharing to themselves and go mostly with paying a tax-deducible wage to their employees.  Honestly, if any employee is valuable enough for a company to be willing to work out that kind of a scheme (I'm not sure what it benefits the company) then they probably would just make them a partner.

[hjfklmor]

For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.

You would be hard pressed to find a company able to otherwise pay its employees $200k but be willing to go in on a scheme like this.  Why not just make everyone a partner with a limited voting interest?

That would also be a solution, and probably a better one, but in my experience most places would rather go in on a scheme like this than have associates be considered partners of any kind, especially when most law firms like my example put a pretty large emphasis on profits per partner.

Yea, but for the same reason I think they'd prefer to keep the profit sharing to themselves and go mostly with paying a tax-deducible wage to their employees.  Honestly, if any employee is valuable enough for a company to be willing to work out that kind of a scheme (I'm not sure what it benefits the company) then they probably would just make them a partner.

Payments to a contractor (Law Firm Peon, LLC) are still deductible to the employer. The effect is neutral to the employer.

[hjfklmor]

This is all purely academic anyhow, no one is going to take the time to pay for someone to set all this up. I was attempting to point out that this crap is complicated and rushing it through is idiotic and making it more complicated. I regret getting lost in the weeds here.

[catastrophe]

This is all purely academic anyhow, no one is going to take the time to pay for someone to set all this up. I was attempting to point out that this crap is complicated and rushing it through is idiotic and making it more complicated. I regret getting lost in the weeds here.

I think every rational human being agrees with you on that.

[catastrophe]

A pretty simple solution to the "wage earner" scheme is to make the same corporate tax deduction applicable to pass-throughs that either (1) generate a certain level of income; or (2) employ a certain number of individuals (subject to minimum wages to avoid any gaming).

Not that I'm really advocating for any of this because business growth is driven by demand, not profits.

[K-S-U-Wildcats!]

This has been a very informative discussion. Thanks everyone.

Who at goEMAW is in charge of the art department? I'd like to request an emoticon of a mouse pushing a wheelbarrow full of cash. Would be super cute and useful for this thread.

[chum1]

Sounds good.

https://twitter.com/edatpost/status/941368943457038336

[catastrophe]

In fairness, it is REALLY hard giving major tax breaks to corporations and families of super rich dead guys without digging ourselves too deep into the deficit.  Gotta make some sacrifices somewhere.

[chum1]

https://twitter.com/damianpaletta/status/941377913949171712

[Dugout DickStone]

Best way to kill this thing is to try to help the poors

[K-S-U-Wildcats!]

Thanks for the update Chum! Try not to be too bitter, ok? It's the holidays!

[gatoveintisiete]

add lil' Marco to the list of butthurt bill killers

[The Big Train]

What happens if they don’t get this thing done?