Taxpayers Guide to LLCs and S Corps
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Section 199A 250k Comparison
By Jason Watson, CPA
Posted Wednesday, October 20, 2021
Same online retailer (not a specified service business) showing single versus married.
|ln||No S||S Corp||No S||S Corp|
|2||less W-2 Wages inc. SEHI, HSA, etc.||0||87,500||0||87,500|
|3||less Payroll Taxes||0||6,694||0||6,694|
|4||Net Business Income Section 199A||250,000||155,806||250,000||155,806|
|5||Adjustments to 1040 / NBI|
|6||less Social Security Tax||7,979||0||7,979||0|
|7||less Medicare Tax||3,348||0||3,348||0|
|8||less SEHI, HSA, etc.||0||0||0||0|
|9||Other Taxable Income||0||0||0||0|
|10||Adjusted Gross Income*||238,673||243,306||238,673||243,306|
|11||Itemized / Std Deductions||12,000||12,000||24,000||24,000|
|12||Taxable Income Before Section 199A||226,673||231,306||214,673||219,306|
|13||Section 199A Net Biz Income||50,000||31,161||50,000||31,161|
|14||Section 199A W-2 Wage Limit||0||43,750||0||43,750|
|15||Section 199A Taxable Income Limit||45,335||46,261||42,935||43,861|
|16||Section 199A Benefit||0||31,161||42,935||31,161|
|17||Marginal Income Tax Rate||35%||35%||24%||24%|
|18||Income Tax Benefit from Section 199A||0||-10,906||-10,304||-7,479|
|19||plus Self-Employment Tax||22,654||0||22,654||0|
|20||plus Tax on Line 12 Delta (above)||0||1,622||0||1,112|
|21||plus Payroll Tax||0||13,388||0||13,388|
|22||Net Tax After Section 199A Benefit||22,654||4,103||12,350||7,021|
|23||Net S Corp Benefit $||18,551||5,329|
*includes the S Corp W-2
There are several notables, takeaways and explanations-
Assumptions are $250,000 in business income prior to $87,500 in reasonable shareholder salary. Itemized deductions are $12,000 as a single taxpayer and $24,000 as a married taxpayer.
Note the spreads in Section 199A deduction benefit on Line 16 and the subsequent income tax benefit on Line 18. In the scenario where the taxpayer is single, he or she is phased out of Section 199A deduction because of income and subsequent W-2 limitations (Line 14).
The example is used to show the limitations of Section 199A due to income based on marital status. However, note that by electing S Corp tax status the Section 199A benefit is identical (Line 16). The difference then becomes the income tax benefit of this deduction which is a factor of marginal tax rates (Line 17).
For couples who are not married, there might be a reason to be legally married without altering your relationship definition just to grab some additional Section 199A benefit. Vegas baby!
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