how to avoid paying excess social security tax when two jobs

Question

Let's say you have one job that during the year pays 204k. The social security cap is 102k, so by the end of June your net salary paid from the start of the year is 102k, and from July to December you pay no social security tax, and neither does your employer. Is this right? So the net social security tax paid for the year is 12648, which is reasonable.

Now let's say you have two jobs that each pay 102k a year. By the end of June is job has paid you 51k, which is below the 102k limit, so they continue to withhold social security till December. As a result, the taxpayer wlil have paid 12648 (6324 from each company) by the end of the year and they can get a refund of 6324 for excess social security tax paid. However, each company pays 6324. So the net social security tax paid by the end of the year is 6324 (employee's portion after claiming excess social security) + 6324 + 6324 -= 18972.

My reason for asking is that if the second company is your own S Corp from which you draw a W2 salary, then you could end up paying more social security tax.

By contrast, if your company was a sole proprietorship, then all your earnings would be on Schedule C. Then Schedule SE will compute the social security tax as zero as follows:

Line 6: Net earnings from self employment = 102000*0.9235 Line 7: Maximum amount subject to SS = 102000

Line 8a for 2008 will read

Total social security wages and tips (total of boxes 3 and 7 on Form(s) W-2) and railroad retirement (tier 1) compensation. If $102,000 or more, skip lines 8b through 10, and go to line 11

So Line 10, social security tax is zero. And if your W2 income from the first job was less than 102k, say 100k, then only 2k of your self- employment income would be subject to social security tax.

Line 11: Medicare = Line6*0.029 = 2731.71

So what's the solution to avoid paying too much social security tax?

Mark Bole · Accepted Answer

[...]If I correctly understand the gist of your message, you want to know if an employer can avoid (or get a credit) for excess of their share of Soc Sec payroll tax paid on wages exceeding an employee's annual limit ($102K this year) due to two or more employers, especially if one of the employers is actually another form of the employee (S-corp).(Just as a thought exercise, how would you allocate such an employer credit, anyway?  Require the two employers to file information returns with each other? Hardly, I think...)A quick search of group archives confirms my hunch, namely: no, you can't.  The law only provides a credit for the employee in this situation.There is also a passing reference to something called a "common paymaster", sounds like affiliated companies can circumvent this problem under some very specific and uncommon circumstances.-Mark Bole

D. Stussy · Answer

Correct. Both employers must pay up to the maximum, and tender a like amount for the employee's share. Only the employee, by filing a 1040, can get a refund of any excess due to having multiple employers. There is no corresponding credit for the employer's shares.

NoSuchPerson · Answer

This doesn't apply to a self-employment tax, though. If you're self-employed and a non-corporate entity, any social security taxes you've paid through an employer applies to your limits when calculating the self-employment taxes.

Right?

Arthur Kamlet · Answer

Right. Just look at the back of a schedule SE.

Phil Marti · Answer

Scrap the S-Corp and operate as a proprietorship or LLC.

removeps-groups · Answer

Is is possible for the corporation to be taxed as a sole proprietorship? This gives you the liability protections of a corporation, but the tax benefits of a sole proprietorship (including not paying too much social security tax, and also 0.9235% of income is subject to SE tax as opposed to 100%). If you previously elected S corp status, how do you elect sole proprietorship status?

Bill Brown · Answer

You liquidate the corporation which is at least one taxable event,perhaps more.

Stuart Bronstein · Answer

To avoid excess self-employement/social security tax? You can do that with an S-corp, too, and pay less tax than a proprietorship.

If it's an S-corporation, pretty much but not exactly. If it's an LLC, the answer is yes, you can chose to be taxed as a proprietorship, C- corporation or S-corporation.

Stu

Katie · Answer

However, if you have an LLC that has elected to be taxed as a corporation and made an S election, in order to go back to sole proprietor (disregarded entity) you must liquidate the corporation and distribute its assets -- a taxable event. See Reg. Sec. 301.7701-3(g) (1)(iii).

If the S corporation holds any appreciated assets (including inventory), gain will be recognized as if the corporation had sold those assets at FMV, and that gain will flow through to the stockholder.

Katie in San Diego

how to avoid paying excess social security tax when two jobs

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