FICA Tax Savings for Small Business Owners

As a new business owner, it’s your responsibility to file taxes correctly. Tax obligations can often cost business owners hundreds of thousands of dollars every year. If you’re interested in saving money and avoiding higher tax costs, we’re here to help.

Before incorporating a business, potential owners take a number of things into consideration. They measure the benefits and responsibilities, and the consider the taxes before they make their entity choice.

Limited liability companies (LLCs) and corporations are the most common entity choices for small businesses. One of the biggest differences between corporations and LLCs is how they operate, what taxes they pay, and how they pay taxes. A huge part of being a business owner is understanding the local, state, and federal tax system. This is extremely important for fulfilling all tax obligations. Because, if you fail to oblige by tax requirements, you can be subject to high fines and serious penalties. Although you pay taxes every year, there are plenty of ways to save on them.

There are five general business taxes:

• Income Tax: All businesses except partnerships must file an annual income tax return. Also, income tax forms will depend on your business structure.
• Estimated Tax: These are the estimated taxes you’ll pay for income and self-employment.
• Self-Employment Tax: This tax is a social security and Medicare tax for people who work for themselves.
• Excise Tax: Taxes you’ll have to file if you manufacture or sell certain products, operate certain kinds of businesses, use certain equipment, facilities, or products, and/or receive payment for certain services.
• Employment Tax: These taxes include FICA Tax — social security and Medicare — income tax withholding, and federal unemployment (FUTA) tax.

Employment Tax – FICA Tax

What is FICA tax?

FICA (Federal Insurance Contributions Act) is a government legislation that passed in 1935 in an effort to fund social security.

Where does FICA go?

According to the Social Security Administration, FICA helps fund these programs to provide benefits for retirees, the disabled, and children. FICA taxes go towards Social Security and Medicare.

What is the current FICA tax rate?

As of 2018 and 2019, the FICA tax rate is at 7.65%. Most of the taxes (6.2%) go to social security and the rest (1.45%) goes to Medicare. According to ADP, social security wage will increase $4,5000 for a total of $132,900 in 2019. (2018 social security wage amount: $128,400). Under the Federal Insurance Contributions Act, it’s your responsibility as a business owner, to withhold the proper amount from your employees’ compensation to pay FICA taxes.

As a business owner, you’ll want to save money anywhere you can. So, how exactly can you save money on FICA taxes? It’s not as hard as you’d think.

Save Money on FICA Taxes: Form an LLC or Corporation

How LLCs are taxed

If you incorporate as an LLC, filing taxes will be easier for you. Since you’re an LLC your taxes pass through. This means that profits of your business ‘pass through’ to the owners (members). Then, you report profits and losses on individual tax returns, but not at the business level. Also, your taxes are based on your total income. Although filing taxes is an easier process for LLCs, it doesn’t mean you’re exempt to FICA taxes.

How corporations are taxed

Corporations are taxed as separate legal entities, which can earn its own income. Corporations must pay tax on their profits, (corporate tax), and tax on dividends the entity distributes to its shareholders. Additionally, dividends are taxed twice, also known as, double taxation. This is not an issue for smaller corporations where only the owners work for the corporation. Instead, owners receive tax-deductible salaries and bonuses.

If you want to save money on FICA taxes for your LLC or Corporation, you’ll need to change your business structure to an S Corporation. But, be warned. The change process isn’t simple. You’ll have to elect to change your business structure to an S Corporation and meet the certain qualifications.

Save Money on FICA Taxes: S Corporation Qualifications

According to the IRS: To receive S corporation status, the corporation must meet the following requirements:

• Be a domestic corporation
• Have only allowable shareholders
  • Must be individuals, certain trusts, and estates and
  • Can’t 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- this accounts for certain financial institutions, insurance companies, and domestic international sales corporation

If you find that you want to change your business structure to an S corporation and you fit the requirements, visit MyCorporation.com.