Section 199A 200k Comparison

By Jason Watson, CPA
Posted Wednesday, October 20, 2021

New day, different problem. This is an online retailer earning $200,000 in business income.

		Vanilla			Other Income
ln		No S	S Corp		No S	S Corp
1	Business Income	200,000	200,000		200,000	200,000
2	less W-2 Wages inc. SEHI, HSA, etc.	0	70,000		0	70,000
3	less Payroll Taxes	0	5,355		0	5,355
4	Net Business Income Section 199A	200,000	124,645		200,000	124,645
5	Adjustments to 1040 / NBI
6	less Social Security Tax	7,979	0		7,979	0
7	less Medicare Tax	2,678	0		2,678	0
8	less SEHI, HSA, etc.	0	0		0	0
9	Other Taxable Income	0	0		100,000	100,000
10	Adjusted Gross Income*	189,342	194,645		289,342	294,645
11	Itemized / Std Deductions	24,000	24,000		24,000	24,000
12	Taxable Income Before Section 199A	165,342	170,645		265,342	270,645
13	Section 199A Net Biz Income	40,000	24,929		40,000	24,929
14	Section 199A W-2 Wage Limit	0	35,000		0	35,000
15	Section 199A Taxable Income Limit	33,068	34,129		53,068	54,129
16	Section 199A Benefit	33,068	24,929		40,000	24,929
17	Marginal Income Tax Rate	24%	24%		24%	24%
18	Income Tax Benefit from Section 199A	-7,936	-5,983		-9,600	-5,983
19	plus Self-Employment Tax	21,315	0		21,315	0
20	plus Tax on Line 12 Delta (above)	0	1,273		0	1,273
21	plus Payroll Tax	0	10,710		0	10,710
22	Net Tax After Section 199A Benefit	13,379	6,000		11,715	6,000
23	Net S Corp Benefit $		7,379			5,715

*includes the S Corp W-2

There are several notables, takeaways and explanations-

Assumptions are $200,000 in business income prior to $70,000 in reasonable shareholder salary. Married taxpayer with $24,000 as a standard deduction (Line 11), with and without an additional $100,000 in taxable income (Line 9) such as a spouse or pension.

Note the spreads in Section 199A deduction benefit on Line 16 and the subsequent income tax benefit from Section 199A on Line 18. This is an interesting example since the extra household income increases the Section 199A deduction significantly.

However, when self-employment taxes and payroll taxes are added back, there is still a material savings even when Social Security limits are reached under the non-S Corp scenario.

If this example had $10,000 in self-employed health insurance premiums the net S Corp benefit (Line 23) would be $9,483 without additional household income (Line 9) and $7,099 with additional household income of $100,000.