The State of S Corps

I have some comments about the payroll taxes mentioned in the article “ S Corporation Profits or Payday?” It is true that if the IRS reclassifies the $50,000 distributions as payroll considerably after the fact, the FUTA on the salary becomes the whole $434 (the whole 6.2% of the first $7,000 of gross), especially if the company happens to be in a state that has no SUI (not that I know if there is such a state, but for the sake of argument let’s assume there is).

If the company had called the $50K a salary in the first place, most likely the company would have paid state unemployment tax (for example, in Pennsylvania the first $8,000 of each employee’s pay each calendar year is taxable, and the rate on a company which had no previous unemployment tax history would be 3.752%) and the employee might have had unemployment tax withheld from the paychecks.

Then, assuming the company paid all its state unemployment tax on time, the FUTA rate would have been only 0.8%, not 6.2%, therefore $56 (not $434) per employee.

The company might have found that its gamble (of trying to get away with zero payroll taxes, and having the IRS reclassify and assert the highest rate for unemployment tax purposes) wasn’t worth it, because if the company had done things properly in the first place, the payroll taxes would have been less.

Amy Lowenstein, CPA
Yardley, Pa.